[Federal Register Volume 76, Number 55 (Tuesday, March 22, 2011)]
[Notices]
[Pages 16024-16026]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-6709]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64085; File No. SR-NYSEAmex-2011-14]
Self-Regulatory Organizations; NYSE Amex LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Adopting Rules
Related to Qualified Contingent Cross Orders
March 17, 2011.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that on March 14, 2011, NYSE Amex LLC (the ``Exchange'' or ``NYSE
Amex'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the self-regulatory
organization. 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\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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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 rules related to Qualified
Contingent Cross Orders (``QCCs''). The text of the proposed rule
change is available at the Exchange, the Commission's Public Reference
Room, and http://www.nyse.com.
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this filing is to adopt rules related to QCCs. The
proposed rule change is based on an International Securities Exchange
(``ISE'') proposal recently approved by the Securities and Exchange
Commission (``Commission'').\4\
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\4\ See Securities Exchange Act Release No. 62523 (July 16,
2010), 75 FR 43211 (July 23, 2010) (SR-ISE-2010-73) (``ISE
Proposal''). See also Securities Exchange Act Release No. 63955
(February 24, 2011), 76 FR 11533 (March 2, 2011) (SR-ISE-2010-73)
(``ISE Approval''). The Exchange notes that letters commenting on
the ISE Proposal were submitted on its behalf by the Exchange's
parent company, NYSE Euronext. See e.g., letters dated August 9,
2010 and October 21, 2010 from Janet L. McGinness, Senior Vice
President--Legal & Corporate Secretary, Legal & Government Affairs,
NYSE Euronext (``NYSE Euronext Comment Letters'').
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Background
The Exchange is currently a party to the Options Order Protection
and Locked/Crossed Market Plan (``Distributive Linkage Plan''),\5\ and
has implemented Exchange rules in conjunction with that plan (the
``Distributive Linkage Rules'').\6\ Similar to Regulation NMS under the
Securities Exchange Act of 1934 (``Exchange Act or ``Act''), the
Distributive Linkage Plan requires, among other things, that the
Exchange establish, maintain and enforce written policies and
procedures that are reasonably designed to prevent ``Trade-Throughs.''
\7\ A Trade-Through is a transaction in an options series at a price
that is inferior to the best price available in the market.\8\
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\5\ See Securities Exchange Act Release No. 60405 (July 30,
2009), 74 FR 39362 (August 6, 2009) (File No. 4-546).
\6\ See Securities Exchange Act Release No. 60526 (August 18,
2009), 74 FR 43185 (August 26, 2009) (SR-NYSEAmex-2009-19).
\7\ Section 5(a) of the Distributive Linkage Plan.
\8\ Section 2(21) of the Distributive Linkage Plan.
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The Distributive Linkage Plan replaced the Plan for the Purpose of
Creating and Operating an Intermarket Option Linkage (``Old Linkage
Plan''), and the Distributive Linkage Rules replaced the then-existing
NYSE Amex rules implementing the Old Linkage Plan (the ``Old Linkage
Rules''). The Old Linkage Plan and the Old Linkage Rules provided a
limited Trade-Through exemption for ``Block Trades,'' defined to be
trades of 500 or more contracts with a premium value of at least
$150,000.\9\ However, as with Regulation NMS, the Distributive Linkage
Plan does not provide a Block Trade exemption.
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\9\ Old Linkage Plan Sections 2(3) and 8(c)(i)(C); and former
NYSE Amex Options Rule 991NY.
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The ISE Proposal stated that the loss of the Block Trade exemption,
among other things, adversely affects the ability of its members to
effect large trades that are tied to stock,\10\ and therefore proposed
the QCC as a limited substitute for the Block Trade exemption. While
our views with respect to the potential impact that the ISE Proposal
may have on market structure remain unchanged,\11\ we nonetheless are
proposing to adopt rules related to QCCs based on those approved for
ISE. In particular, we believe that such a rule change would permit the
Exchange to remain competitive with ISE, and the other options
exchanges that may also adopt rules for QCCs, by making QCCs available
to ATP Holders and their customers through the Exchange.
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\10\ See ISE Proposal at 43212.
\11\ See NYSE Euronext Comment Letters, supra note 1[sic].
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Discussion
While Regulation NMS does not provide a block trade exemption from
trade-through liability for stocks, the Commission, by order, has
provided trade-through relief for ``Qualified Contingent Trades''
(``QCTs'').\12\ The QCT Release provides an exemption from trade-
through liability in the equity market for multi-component, fully-
hedged trades where one order is contingent on the execution of one or
more additional orders. Building on this concept, and as approved for
ISE, the Exchange proposes that when an NYSE Amex ATP Holder effects a
QCT trade in a Regulation NMS Stock, that ATP Holder be permitted to
cross the options leg of the trade on the Exchange immediately upon
entry if the order is
[[Page 16025]]
for at least 1,000 contracts, is part of a QCT, is executed at a price
at least equal to the national best bid or offer (``NBBO''), and there
are no Customer Orders on the Exchange's Consolidated Book at the same
price.\13\
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\12\ See Securities Exchange Act Release No. 57620 (April 4,
2008), 73 FR 19271 (April 9, 2008) (the ``QCT Release''). That
release superseded a release initially granting the Qualified
Contingent Trade exemption. See Securities Exchange Act Release No.
54389 (August 31, 2006), 71 FR 52829 (September 7, 2006).
\13\ We propose to define a QCC trade substantively identical to
the Commission's definition in the QCT release as well as that in
the ISE Proposal. A QCC trade must meet the following conditions:
(i) At least one component must be an NMS Stock; (ii) all the
components must be effected with a product price contingency that
either has been agreed to by all the respective counterparties or
arranged for by a broker-dealer as principal or agent; (iii) the
execution of one component must be contingent upon the execution of
all other components at or near the same time; (iv) the specific
relationship between the component orders (e.g., the spread between
the prices of the component orders) must be determined by the time
the contingent order is placed; (v) the component orders must bear a
derivative relationship to one another, represent different classes
of shares of the same issuer, or involve the securities of
participants in mergers or with intentions to merge that have been
announced or cancelled; and (vi) the transaction must be fully
hedged (without regard to any prior existing position) as a result
of other components of the contingent trade. Consistent with the QCT
Release and the ISE Proposal, ATP Holders must demonstrate that the
transaction is fully hedged using reasonable risk-valuation
methodologies. See QCT Release, supra note 9[sic], at footnote 9.
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The QCC would permit ATP Holders to provide their customers a net
price for the entire trade, and then allow the ATP Holder to execute
the options leg of the trade on NYSE Amex at a price at least equal to
the NBBO while using the QCT exemption to effect the trade in the
equities leg at a price necessary to achieve the net price.\14\ Under
the proposal, the Exchange would not permit the options component of a
stock-option order to trade through the NBBO.\15\ However, there are
times when the quotation spread for the option on the Exchange would
not permit an execution of the options component between the Exchange
BBO, particularly in options that trade in increments greater than
$0.01. In those cases, the Exchange proposes to permit an execution of
the options component at a price that matches the Exchange BBO.
Moreover, under the proposal, the Exchange would not permit the
execution of a QCC at the same price as a Customer Order on the
Consolidated Book. In such a case, the QCC will be rejected.\16\
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\14\ NYSE Amex will adopt policies and procedures to ensure that
ATP Holders use the Qualified Contingent Cross Order properly.
First, we will require ATP Holders to properly mark all Qualified
Contingent Cross Orders as such. In addition, FINRA, on behalf of
NYSE Amex, will implement an examination and surveillance program to
assess ATP Holder compliance with the requirements applicable to
Qualified Contingent Cross Orders, including the requirement that
the stock leg of the transaction be executed at or near the same
time as the options leg.
\15\ While the QCC would not provide exposure for price
improvement for the options leg of a stock-option order, the options
leg must be executed at the NBBO or better. The Commission has
previously approved crossing transactions with no opportunity for
price improvement. See e.g., ISE Rule 721(a) and Chicago Board
Options Exchange (``CBOE'') Rule 6.74A, Interpretations and Policies
.08.
\16\ The Commission has previously approved the rejection of
crossing transactions when there is a priority customer order on the
book at the same price. See, e.g., ISE Rule 721(a); and CBOE Rule
6.74A, Interpretations and Policies .08.
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Furthermore, under this proposal, the Exchange would only permit
QCCs to be submitted electronically from off the Floor through the NYSE
Amex System. In this regard, an ATP Holder located on the Floor of the
Exchange would not be allowed to enter QCCs into the NYSE Amex System,
or otherwise effect them in open outcry. In this way, our proposal
provides for the same means to effect QCCs on the Exchange as that of
the ISE. We plan to file a separate proposed rule change to address
effecting QCCs in open outcry on the Floor of the Exchange.
To provide a mechanism for the Exchange to surveil for whether QCCs
were entered from off of the Floor, the Exchange proposes to adopt
Commentary .01 to Rule 985NY. This provision would require ATP Holders
to maintain books and records demonstrating that each Qualified
Contingent Cross Order was routed to the NYSE Amex System from off of
the Floor. Any Qualified Contingent Cross Order that does not have a
corresponding record required by this provision would be deemed to have
been entered from on the Floor in violation of Rule 985NY.\17\
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\17\ The Commission notes that the Exchange inadvertently
omitted the following paragraph from its filing and requested that
the Commission include it in this notice: The Exchange's proposal
addresses the mechanics of executing the stock and options
components of a net-price transaction. The Exchange believes that it
is necessary that it provide ATP Holders and their customers with
the same trading capabilities available on other exchanges with
respect to QCCs, including the change proposed herein, which would
permit ATP Holders to execute the options legs of their customers'
large complex orders on the Exchange. See e-mail from Joseph P.
Corcoran, Chief Counsel, Legal and Government Affairs, New York
Stock Exchange LLC, to Jennifer L. Colihan, Special Counsel,
Division of Trading and Markets, Commission, dated March 16, 2011.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent
withSection 6(b) of the Act \18\ in general, and furthers the
objectives of Section 6(b)(5) of the Act,\19\ 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. The proposed rules are consistent with the protection of
investors in that they are designed to prevent Trade-Throughs. In
addition, the proposed rule change would promote a free and open market
by permitting the Exchange to compete with ISE for these types of
orders. In this regard, competition would result in benefits to the
investing public, whereas a lack of competition would serve to limit
the choices that the public has for execution of their options
business.
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\18\ 15 U.S.C. 78f(b).
\19\ 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. Instead, the proposed rule
change would prevent the otherwise significant burden on competition
that would arise if ISE were permitted to implement QCCs without a
similar functionality being made available to market participants
across all U.S. markets for listed options, including ATP Holders on
the Exchange.
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 filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \20\ and Rule 19b-4(f)(6) thereunder.\21\
Because the proposed rule change does not: (i) Significantly affect the
protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative prior to
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, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A)
[[Page 16026]]
of the Act and Rule 19b-4(f)(6)(iii) thereunder.
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\20\ 15 U.S.C. 78s(b)(3)(A)(iii).
\21\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give 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.
The Commission has waived this requirement.
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At any time within 60 days of the filing of such 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-NYSEAmex-2011-14 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-NYSEAmex-2011-14.
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 Section, 100
F Street, NE., Washington, DC 20549-1090 on official business days
between the hours of 10 a.m. and 3 p.m. Copies of the filing will also
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 available publicly. All
submissions should refer to File Number SR-NYSEAmex-2011-14 and should
be submitted on or before April 12, 2011.
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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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-6709 Filed 3-21-11; 8:45 am]
BILLING CODE 8011-01-P