[Federal Register Volume 76, Number 8 (Wednesday, January 12, 2011)]
[Notices]
[Pages 2183-2186]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-446]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63660; File No. SR-NYSEArca-2010-124]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change Amending NYSE
Arca Options Rule 6.62(h) to Define Stock/Complex Orders, Amending NYSE
Arca Options Rule 6.75(g) to Update and Clarify the Priority of Complex
Orders, and Amending NYSE Arca Options Rule 6.91 to Establish a Complex
Order Auction
January 6, 2011.
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 30, 2010, NYSE Arca, Inc. (``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 NYSE Arca. NYSE Arca has submitted the proposed
rule change under Section 19(b)(3)(A) of the Act \3\ and Rule 19b-
4(f)(6) thereunder,\4\ which renders the proposal effective upon filing
with the Commission. 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).
\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 amend NYSE Arca Options Rule 6.62(h) to
define Stock/Complex Orders, amend NYSE Arca Options Rule 6.75(g) to
update and clarify the priority of Complex Orders, and amend NYSE Arca
Options Rule 6.91 to establish a Complex Order Auction.
A copy of this filing is available on the Exchange's Internet Web
site at http://www.nyse.com, on the Commission's Internet Web site at
http://www.sec.gov, at the Exchange's principal office, and at the
Commission.
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 III below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this filing is to update and streamline the rules
governing open outcry trading of Complex Orders, including the
definition of a Stock/Complex Order, and to adopt new rules to provide
for a Complex Order Auction (``COA'') in the Electronic Complex Order
rules, based on rules recently approved for NYSE Amex LLC
(``Amex'').\5\ The filing also clarifies the minimum trading and
quoting increment permissible for Complex Orders.
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\5\ See Securities Exchange Act Release No. 63558 (December 16,
2010), 75 FR 80553 (December 22, 2010) (Order approving SR-NYSEAmex-
2010-100).
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Stock/Complex Orders
NYSE Arca proposes to amend Rule 6.62(h) to define Stock/Complex
Orders as orders for the purchase or sale of a Complex Order coupled
with an order to buy or sell a stated number of units of an underlying
stock or a security convertible into the underlying stock
(``convertible security'') representing either (A) the same number of
units of the underlying stock or convertible security as are
represented by the options leg of the Complex Order with the least
number of contracts, or (B) the number of units of the underlying stock
necessary to create a delta neutral position, but in no case in a ratio
greater than 8 options contracts per unit of trading of the underlying
stock or convertible security established for that series by the
Clearing Corporation, as represented by the options leg of the Complex
Order with the least number of options contracts.
Revision to Complex Order Open Outcry Rules
NYSE Arca proposes to amend Rule 6.75 and Commentary .01 to Rule
6.75. The Exchange proposes to adopt a provision based on NYSE Amex LLC
(``Amex'') Rule 963NY(d) to describe the priority of Complex Orders in
open outcry. The new language does not change the process of executing
a Complex Order or alter the priority of quotes and orders; rather, it
streamlines and updates the rule text.
Currently, when executing a Complex Order, contra sided complex
trading interest in the Trading Crowd has priority over individual
orders and quotes in the leg markets at the same net debit or credit
price, except when individual Customer orders in the Consolidated Book
are present in all of the leg markets. When there are Customer orders
present in all legs at the same net debit or credit price, the Complex
Order must first trade with the individual Customer orders, and may
then trade against complex trading interest in the crowd. Complex
Orders trading against contra side complex trading interest in the
Trading Crowd must otherwise trade at least one leg at a price that is
at least one minimum price variation better than individual Customer
orders in the Consolidated Book.\6\
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\6\ Stock/options orders may not trade at the same price as a
Customer order in the option leg, unless satisfying the Customer
order first, even though the Customer order cannot satisfy all the
terms of the Stock/option order.
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The proposed rule change will not alter these procedures or
priorities.
In addition, the Exchange is clarifying that Stock/Complex Orders
(involving two or more options legs and a stock leg) may be executed at
a net debit or credit price with another OTP Holder
[[Page 2184]]
without giving priority to equivalent bids (offers) in the individual
series legs that are represented in the Trading Crowd or Customer limit
orders in the Consolidated Book, provided at least one options leg of
the order betters the corresponding Customer bid (offer) in the
Consolidated Book by at least one minimum trading increment.
NYSE Arca also proposes to delete Commentary.01 to Rule 6.75. The
proposed Rule 6.75 (g) describes priority for all Complex Orders and
Stock/Option Orders, while Commentary .01 to Rule 6.75 generally only
describes the procedures for executing complex transactions; it does
not define or describe any execution priority, obligation, or privilege
that was not already described in other rules. Additionally, those
procedures did not lay out procedures for all complex transactions; it
narrowly described only simple Complex Orders with two option legs. The
proposed rule change specifically eliminates the description of a
``locked book market'' in Commentary .01(f). This provision was a
description of a narrow circumstance, and was more appropriate when the
Public Customer Book was maintained by an Order Book Official. At that
time, the Order Book had priority to trade at a given price if it held
an order. Paragraph (f) described a situation where the Order Book had
orders at all of the prices where a Complex Order might trade, but the
orders in the leg markets could not satisfy the terms of the Complex
Order. The proposed new language addresses this and similar
circumstances in a more clear manner.
Complex Order Auction
Additionally, the Exchange proposes to adopt rules establishing an
Electronic Complex Order Auction, based on rules approved for use by
NYSE Amex LLC. Amex Rule 980NY(e) describes the process for a Complex
Order Request for Responses (``RFR'') Auction. NYSE Arca proposes a
similar auction under Rule 6.91.
Proposed paragraph (c) of Rule 6.91 will describe the COA process.
The proposed rule change will give the Exchange the authority to
determine, on a class by class basis, which incoming orders are
eligible for a COA based on marketability (defined as a number of ticks
from the current market), size, and Complex Order type (``COA-eligible
orders'').\7\
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\7\ For example, the Exchange could determine that a complex
order with two option legs are eligible for a COA to the extent they
are less than two ticks away from the ``top of the book,'' which
would be the best price considering the net prices available among
Complex Orders in the Consolidated Book and the individual component
legs in the Consolidated Book. All pronouncements, including changes
hereto, regarding COA eligibility and Response Time Intervals will
be announced to OTP Holders via Regulatory Circular.
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Upon receiving a COA-eligible order and a request by the OTP Holder
representing the order that it be COA'd, the Exchange will send an RFR
message to OTP Holders with an interface connection to NYSE Arca that
have elected to receive such RFR messages. This RFR message will
identify the component series, the size of the COA-eligible order and
any contingencies, if applicable. However, the RFR will not identify
the side of the market (i.e., whether the COA-eligible order is to buy
or sell).
Market Makers with an appointment in the relevant options class,
and OTP Holders acting as agent for orders resting at the top of the
Consolidated Book in the relevant options series, may electronically
submit responses (``RFR Responses''), and modify, but not withdraw, the
RFR response at anytime during the request response time interval (the
``Response Time Interval''). RFR responses must be in a permissible
ratio, and may be expressed on a net price basis in a one cent
increment. In addition, RFR Responses will be visible to those who have
subscribed to RFRs. The applicable Response Time Interval will be
determined by the Exchange on a class by class basis, and, in any
event, will not exceed one second. Proposed Rule 6.91(c)(3) also
clarifies that the obligations of Rule 6.47A, Order Exposure
Requirements--OX, are separate from the duration of the Response Time
Interval.
When the Response Time Interval expires, the COA-eligible order
will be executed and allocated to the extent it is marketable, or route
to the Consolidated Book to the extent it is not marketable. If
executed, the rules of trading priority will provide that the COA-
eligible order be executed based first on net price, and, at the same
price:
(i) Pre-existing interest in the leg markets: individual orders and
quotes in the leg markets resting in the Consolidated Book prior to the
initiation of a COA will have first priority to trade against a COA-
eligible order;
(ii) Customer Complex interest received during the Auction:
Customer Electronic Complex Orders resting in the Consolidated Book
before or that are received during, the Response Time Interval and
Customer RFR Responses shall, collectively have second priority to
trade against a COA-eligible order. The allocation of a COA-eligible
order against the Customer Electronic Complex Orders resting in the
Consolidated Book shall be on a Size Pro Rata basis;
(iii) Non-Customer Complex trading interest: Non-Customer interest,
comprised of Electronic Complex Orders resting in the Consolidated
Book, Electronic Complex Orders placed in the Consolidated Book during
the Response Time Interval, and RFR Responses, will collectively have
third priority. The allocation of COA-eligible orders against these
contra sided orders will be on a Size Pro Rata basis;
(iv) Trading Interest that improves the derived Complex Best Bid/
Offer: Individual orders and quotes in the leg markets that cause the
derived Complex Best Bid/Offer to be improved during the COA, and which
match the best RFR Response and/or Complex Orders received during the
Response Time Interval, will be filled after Complex Orders and RFR
Responses at the same net price.\8\ Allocations within the first
category above (individual orders and quotes in the leg markets in the
Consolidated Book) shall be in time, with Customer orders having
priority ahead of non-customer orders and quotes at the same price.
Allocations within the second category above (Customer Electronic
Complex Orders resting in the Consolidated Book and Customer RFR
responses) shall be based on a Size Pro Rata basis when multiple
Customer Complex Orders or RFR responses exist at the same price.
Allocations within the third category (non-Customer Electronic Complex
Orders in the Consolidated Book and non-Customer RFR responses) shall
be based on a Size Pro Rata basis when multiple non-Customer interests
exist at the same price. Allocations among the fourth category
(individual orders or quotes in the leg markets that cause the derived
BBO to be improved) shall be filled on a Customer order/size pro rata
basis.
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\8\ See Securities Exchange Act Release No. 58361 (August 14,
2008), 73 FR 49529 (August 21, 2008) (approving SR-Phlx-2008-50).
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The following is an example of a COA: assume the Exchange's derived
complex market, based on individual series orders and quotes in the
Consolidated Book, is offered at $1.15 for 20 contracts. In addition,
assume a Customer Electronic Complex Order resting in the Consolidated
Book is offered at $1.15 for five contracts and two non-Customer orders
resting in the Consolidated Book are offered at $1.15 for five
contracts each (for a total of 10 contracts). A COA-eligible order is
then received to buy the complex strategy 100 times paying $1.15. COA
will auction the order. An RFR message is
[[Page 2185]]
sent to subscribers indicating the Complex Order series and the size of
100 contracts (but not the side of the market). The Response Time
Interval for submitting RFR Responses will be for no more than one
second. Before the conclusion of the Response Time Interval, the
following RFR Responses on the other side are received: Customer RFR
Responses to sell five at $1.14 and five at $1.15; and non-Customer RFR
Responses to sell 15 at a price of $1.13, 35 at a price of $1.14, and
100 at a price of $1.15. The execution of the COA-eligible order will
proceed as follows:
15 contracts get filled at $1.13 (against non-Customer RFR
Responses);
40 contracts get filled at $1.14 (five contracts against
Customer RFR Responses, then 35 contracts against non-Customer RFR
Responses); and
45 contracts get filled at $1.15 (20 contracts against the
individual series legs in the Consolidated Book, then 10 contracts
against Customer Electronic Complex Orders in the Consolidated Book and
Customer RFR Responses allocated on a Size Pro Rata basis. The non-
Customer interest is allocated on a Size Pro Rata basis as follows: 1
contract ((5/110) x 15) for each of the non-Customer Electronic Complex
Orders resting in the Consolidated Book before the COA began, and 13
contracts ((100/110) x 15) against the non-Customer RFR Response).
The proposed rule change also describes the handing of unrelated
incoming Electronic Complex Orders that may be received prior to the
expiration of the COA. Specifically, the proposed rule change provides
the following:
An incoming Electronic Complex Order received prior to the
expiration of the Response Time Interval for a pending COA (the
``original COA'') that is on the opposite side of the original COA-
eligible order and is marketable against the starting price of the
original COA-eligible order will be ranked in price time with RFR
Responses by account type. The original COA-eligible order will be
executed and allocated as described in proposed subparagraph (c)(6) of
Rule 6.91. Any remaining balance of either the initiating COA-eligible
order or the incoming Electronic Complex order will be placed in the
Consolidated Book and ranked as described in subparagraph (a)(1) of
Rule 6.91.
Incoming COA-eligible orders that are received prior to
the expiration of the Response Time Interval for the original COA that
are on the same side of the market, that are price [sic] equal to the
original COA-eligible order will join the COA. A message with the
updated size will be published. The new order will be ranked and
executed with the initiating COA-eligible order in price time order.
Any remaining balance of either the initiating COA-eligible order and/
or the incoming Electronic Complex order will be placed in the
Consolidated Book and ranked as described in subparagraph (a)(1) of
Rule 6.91.
Incoming COA-eligible orders received during the Response
Time Interval for the original COA-eligible order that are on the same
side of the market, and that are priced worse than the initiating
order, will join the COA. The new order(s) will be ranked and executed
with the initiating COA-eligible order in price time order. Any
remaining balance of either the initiating COA-eligible order and/or
the incoming Electronic Complex order(s) will be placed in the
Consolidated Book and ranked as described in subparagraph (a)(1) of
Rule 6.91.
An incoming COA-eligible order that is received prior to
the expiration of the Response Time Interval for the original COA that
is on the same side of the market and at a better price than the
original COA-eligible order will cause the auction to end. The
initiating COA-eligible order will be executed in accordance with
subparagraph (c)(6). The COA-eligible order that caused the auction to
end will then be executed in accordance with subparagraph (c)(6), and
any unexecuted portion will either be (i) placed in the Consolidated
Book, or (ii) if marketable, initiate another COA.
The Exchange is proposing to amend Commentary .02 to Rule 6.91 to
clarify that if the class has been designated as eligible for Complex
Order Auctions then at least one leg of the order must trade at a price
that is better than the corresponding price of the customer bids or
offers in the Consolidated Book for the same series, by at least one
cent ($.01).
New Commentary .03 to Rule 6.91 is also proposed to clarify the
priority of Stock/Option Orders and Stock/Complex Orders to (a) confirm
that the execution of the stock component must be executed consistent
with the rules of the stock execution venue; (b) clarify the priority
of the option component of a stock option order over bids and offers in
the Consolidated Book, but not over Customer orders at the same price
in the Consolidated Book; (c) clarify that Stock/Option Orders and
Stock/Complex Orders submitted to the Complex Matching Engine will
trade first against other Stock/Option or Stock/Complex Orders resting
in the Consolidated Book, then against individual orders and quotes on
the Exchange, and lastly against orders and quotes subsequently entered
by Market Participants; and (d) clarify the priority of the option
components of a Stock/Complex Order over bids and offers in the
Consolidated Book, unless there are Customer bids and offers in the
Consolidated Book on each of the component leg markets.
Proposed Commentary .04 states that a pattern or practice of
submitting unrelated orders that cause a COA to conclude early will be
deemed conduct inconsistent with just and equitable principles of
trade. Dissemination of information related to COA-eligible orders to
third parties will also be deemed as conduct inconsistent with just and
equitable principles of trade.
Finally, NYSE Arca is proposing the RFR Responses can be modified
but not withdrawn at any time before the end of the Response Time
Interval. RFR Responses are firm only with respect to COA-eligible
orders and RFR Responses received during the Response Time Interval.
Any RFR response not accepted to trade either in whole or in a
permissible ratio, would expire at the end of the Response Time
Interval and would not be eligible to trade with the Consolidated Book.
Complex Order Minimum Increments
NYSE Arca is proposing to revise and clarify the minimum increments
that are permissible for bids and offers on Complex Orders. The
Exchange believes these changes will facilitate the orderly execution
of Complex Orders in open outcry and via the Consolidated Book and the
COA mechanism. With respect to minimum increments, currently Rules 6.75
and 6.91 provide that the Complex Orders may generally be expressed in
any increments regardless of the minimum increment otherwise
appropriate to the individual legs of the order. Thus, for example, a
Complex Order could be entered at a net debit or credit price of $1.03
even though the standard minimum increment for the individual series is
generally $0.05 or $0.10. The Exchange is proposing to clarify in Rule
6.75 and 6.91 that Complex Orders entered onto the Exchange, and/or
resting in the Consolidated Book may be expressed on a net price basis
in a multiple of the minimum increment (i.e., $0.01, $0.05, or $0.10,
as applicable) or in a one-cent increment as determined by the Exchange
on a class-by class basis.
NYSE Arca represents that any Customer Electronic Complex Orders
entered to the NYSE Arca System must comply with the order exposure
requirements of Rule 6.47A, which
[[Page 2186]]
prohibits a User from executing as principal against an order it
represents as agent, unless the agency order is first exposed on the
Exchange for at least one (1) second, or the User has been bidding or
offering on the Exchange for at least one (1) second, prior to
receiving an agency order that is excutable against such bid or offer.
NYSE Arca notes that all components of a Complex Order, a Stock/
Option Order, or a Stock/Complex Order must be entered into the NYSE
Arca System and displayed at a total or net debit or credit, and that
all components of a Complex Order, a Stock/Option Order, or a Stock/
Complex Order, including the stock component of a Stock/Option Order or
Stock/Complex Order, must be traded as a complete package.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
and furthers the objectives of Section 6(b)(5) of the Act \9\ in that
it is designed to promote just and equitable principles of trade,
remove impediments to and perfect the mechanisms of a free and open
market and a national market system and, in general, to protect
investors and the public interest. In particular, investors will have
greater opportunities to manage risk with the Exchange defining Stock/
Complex Orders, by the Exchange revising the coverage under Rule
6.75(g) to clarify its applicability, and with the removal of ambiguity
by deleting obsolete text in Commentary .01 to Rule 6.75. The proposed
adoption of rules governing a Complex Order Auction will facilitate the
execution of Complex Orders while providing opportunities for price
improvement.
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\9\ 15 U.S.C. 78f(b)(5).
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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
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 designated the proposed rule change as one that:
(1) Does not significantly affect the protection of investors or the
public interest; (2) does not impose any significant burden on
competition; and (3) does not become operative for 30 days from the
date of filing, or such shorter time as the Commission may designate if
consistent with the protection of investors and the public interest.
Therefore, the proposed rule change has become effective pursuant to
Section 19(b)(3)(A) of the Act \10\ and Rule 19b-4(f)(6)
thereunder.\11\
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\10\ 15 U.S.C. 78s(b)(3)(A).
\11\ 17 CFR 240.19b-4(f)(6). Rule 19b-4(f)(6)(iii) also requires
an exchange to provide the Commission with 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 the proposed rule change
or such shorter time as the Commission may designate. The Exchange
satisfied this requirement.
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NYSE Arca has requested that the Commission waive the 30-day
operative delay. Because the Commission believes that waiving the 30-
day operative delay is consistent with the protection of investors and
the public interest, the Commission grants NYSE Arca's request.\12\ As
noted above, the proposal is based on Amex rules that the Commission
recently approved.\13\ The Commission received no comments regarding
the Amex's proposal. In addition, the Commission believes that the
proposal could enhance competition for Complex Orders on the Exchange
by establishing an electronic COA for Complex Orders.
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\12\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposal's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\13\ See note 5, supra.
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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.
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 e-mail to [email protected]. Please include
File Number SR-NYSEArca-2010-124 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2010-124. 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 NYSE's principal office and
on its Internet Web site at http://www.nyse.com. 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 publicly available. All submissions
should refer to File Number SR-NYSEArca-2010-124 and should be
submitted on or before February 2, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-446 Filed 1-11-11; 8:45 am]
BILLING CODE 8011-01-P