[Federal Register Volume 75, Number 45 (Tuesday, March 9, 2010)]
[Notices]
[Pages 10851-10853]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-4909]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61629; File No. SR-NYSEAmex-2010-18)


Self-Regulatory Organizations; NYSE Amex LLC; Notice of Filing of 
Proposed Rule Change Relating to the Designation of a ``Professional 
Customer''

March 2, 2010.
    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 February 25, 2010, NYSE Amex LLC (``NYSE Amex'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III 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 designate any Customer 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 text of the proposed rule change is attached as Exhibit 5 to the 
19b-4 form. A copy of this filing is available on the Exchange's Web 
site at http://www.nyse.com, at the Exchange's principal office and at 
the Commission's Public Reference Room.

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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Under NYSE Amex rules, a ``Customer'' is an individual or 
organization that is not a Broker/Dealer.\4\ This term is used in 
specific NYSE Amex rules that provide certain marketplace advantages to 
Customer orders over non-customer orders (e.g., orders for the account 
of ATP holders or broker/dealers). In particular, under NYSE Amex 
rules, subject to certain exceptions, (i) Customer orders are given 
priority over non-customer orders and Market-Maker quotes at the same 
price,\5\ and (ii) ATP holders are generally not charged a transaction 
fee for the execution of Customer orders. The purpose of providing 
these marketplace advantages to Customer orders is to attract retail 
investor order flow to the Exchange by leveling the playing field for 
retail investors over market professionals\6\ and to provide 
competitive pricing.
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    \4\ See NYSE Amex Rule 900.2NY(18).
    \5\ See, e.g., NYSE Amex Rule 963NY Priority and Order 
Allocation Procedures--Open Outcry, 963.1NY Complex Order 
Transactions, 964NY Display, Priority and Order Allocation--Trading 
Systems, and 980NY(b) Priority of Complex Orders in the Consolidated 
Book.
    \6\ Market professionals have access to sophisticated trading 
systems that contain functionality not available to retail 
investors, including things such as continuously updated pricing 
models based on real-time streaming data, access to multiple markets 
simultaneously, and order and risk management tools.
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    With respect to these NYSE Amex marketplace advantages, the 
Exchange does not believe the definition of Customer versus a non-
Customer properly distinguishes between non-professional retail 
investors and certain professionals. The Exchange believes that 
providing marketplace advantages based upon whether the order is for 
the account of a participant that is a registered Broker/Dealer is no 
longer appropriate in today's marketplace because some non-broker-
dealer individuals and entities have access to information and 
technology that enables them to professionally trade listed options in 
the same manner as a broker or dealer in securities.\7\ These 
individual traders and entities (collectively, ``Professional 
Customers'') have the same technological and informational advantages 
over retail investors as broker-dealers trading for their own account, 
which enables them to compete effectively with broker-dealer orders and 
market maker quotes for execution opportunities in the NYSE Amex 
marketplace.\8\
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    \7\ For example, some Broker/Dealers provide professional 
customers with multi-screened trading stations equipped with trading 
technology that allows the trader to monitor and place orders on all 
seven options exchanges simultaneously. These trading stations also 
provide compliance filters, order management tools, the ability to 
place orders in the underlying securities, and market data feeds. 
See Securities Exchange Act Releases 59287 (January 23, 2009), 74 FR 
5694 (January 30, 2009) (SR-ISE-2006-26) (order approving 
International Securities Exchange (``ISE'') proposal to introduce 
priority customer and professional orders) and 57254 (February 1, 
2008), 73 FR 7345(February 7, 2008) (SR-ISE-2006-26) (notice of ISE 
proposal to introduce priority customer and professional orders) at 
note 8, See also Securities Exchange Act Release 61198 (December 17, 
2009), 74 FR 68880 (December 29, 2009) (SR-CBOE-2009-078) (order 
approving CBOE proposal to introduce Professional Customers).
    \8\ Market Makers enter quotes based on the theoretical value of 
the option, which moves with various factors in their pricing 
models, such as the value of the underlying security. Professional 
customers place and cancel orders in relation to an option's 
theoretical value in much the same manner as a Market Maker. This is 
evidenced by the entry of limit orders that join the best bid or 
offer and by a very high rate of orders that are entered and 
cancelled. In contrast, retail investors who enter orders as part of 
an investment strategy (such as a buy/write or directional trade) 
most frequently enter marketable orders or limit orders that they do 
not cancel and replace. See, e.g., Securities Exchange Act Release 
57254 at note 9.
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    The Exchange therefore does not believe that it is consistent with 
fair competition for these professional account holders to continue to 
receive the same marketplace advantages as retail investors over 
Broker/Dealers trading on NYSE Amex. Moreover, because Customer orders 
at the same price are executed in time priority, retail investors are 
prevented from fully benefiting from the priority advantage when 
Professional Customers are afforded Customer order priority.
    Accordingly, the Exchange is seeking to adopt a new term that will 
be used to more appropriately provide NYSE Amex marketplace advantages 
to retail investors on NYSE Amex. Under the proposal, a ``Professional 
Customer'' will

[[Page 10852]]

be defined in proposed 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 will be treated in the same manner as a broker or dealer in 
securities for 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.
    The use of this new term for purposes of the above-referenced 
execution rules will result in Professional Customer account holders 
participating in NYSE Amex's allocation process on equal terms with 
Broker/Dealer orders. The proposal will not otherwise affect non-
Broker/Dealer individuals or entities under NYSE Amex rules. For 
example, NYSE Amex will provide the same away-market protection for all 
Customer orders, including non-Broker/Dealer orders that are included 
in the definition of ``Professional Customer'' orders.
    In order to properly represent orders entered on the Exchange 
according to the new definitions, ATP holders will be required to 
indicate whether Customer orders are ``Professional Customer'' 
orders.\9\ To comply with this requirement, ATP holders will 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.\10\
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    \9\ 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 will be marked with an 
origin code of ``PC.'' These Professional Customer identifiers will 
also flow through Exchange systems into audit trail and trade 
reporting data.
    \10\ 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 will be required to conduct a quarterly review 
and make any appropriate changes to the way in which they are 
representing orders within five days after the end of each calendar 
quarter. While members only will 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 will notify the ATP Holder and the ATP 
Holder will be required to change the manner in which it is 
representing the customer's orders within five days.
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    Lastly, the Exchange intends to establish, via a separate rule 
filing, transaction fees applicable to Professional Customers. The 
Exchange will not commence the Professional Customer program until such 
fees are in place.
    Section 11(a) of the Act prohibits any 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 persons exercises discretion unless an 
exception applies.\11\ Section 11(a)(1) contains a number of exceptions 
for principal transactions by members and their associated persons. One 
such exception, set forth in subparagraph (G) of Section 11(a)(1) and 
in Rule 11a1-1(T),\12\ permits any transaction for a member's own 
account provided, among other things, that the transaction yields 
priority, parity, and precedence to orders for the account of persons 
who are not member or associated with members of the exchange. Exchange 
rules, therefore, may require members to yield priority to the orders 
of non-ATP Holders, including Customers, to satisfy this exception to 
Section 11(a).\13\ Another exception permits market makers to effect 
transactions on exchanges in which they are members.\14\
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    \11\ 15 U.S.C. 78k(a).
    \12\ 17 CFR 240.11a1-1(T).
    \13\ See, NYSE Amex Rule 910NY.
    \14\ Section 11(a)(1)(A).
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    In addition to the exceptions noted above, Rule 11a2-2(T) under the 
Act\15\ provides exchange members with an exception from the 
prohibitions in Section 11(a). Rule 11a2-2(T), known as the ``effect 
versus execute'' rule, permits an exchange member, subject to certain 
conditions, to effect transactions for its own account, the account of 
an associated person, or an account with respect to which it or an 
associated person thereof exercises investment discretion (collectively 
``covered accounts'') by arranging for an unaffiliated member to 
execute the transaction on the exchange.
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    \15\ 17 CFR 240.11a2-2(T).
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    To comply with the ``effect versus execute'' rule's conditions, a 
member: (i) Must transmit the order from off the exchange floor; (ii) 
may not participate in the execution of the transaction once it has 
been transmitted to the member performing the execution;\16\ (iii) may 
not be affiliated with the executing member; and (iv) with respect to 
an account over which the member has investment discretion, neither the 
member nor its associated person may retain any compensation in 
connection with effecting the transaction except as provided in the 
rule.\17\
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    \16\ The ATP Holder, however, may participate in clearing and 
settling the transaction.
    \17\ 17 CFR 240.11a2-2(T).
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    The Exchange does not believe that its proposal relating to 
Professional Customer orders would 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.\18\
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    \18\ See Securities Exchange Act Release No. 59546 (March 10, 
2009), 74 FR 11144 (March 16, 2009) (SR-CBOE-2009-016).
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    The Exchange believes that identifying Professional Customer 
account holders based upon the average number of orders entered for a 
beneficial account is an appropriately objective approach that will 
reasonably distinguish such persons and entities from retail investors. 
The Exchange proposes the threshold of 390 orders per day on average 
over a calendar month because it believes it far exceeds the number of 
orders that are entered by retail investors in a single day,\19\ while 
being a sufficiently low number of orders to cover the Professional 
account

[[Page 10853]]

holders that are competing with Broker/Dealers in the NYSE Amex 
marketplace. In addition, basing the standard on the number of orders 
that are entered in listed options for a beneficial account(s) assures 
that Professional Customer account holders cannot inappropriately avoid 
the purpose of the rule by spreading their trading activity over 
multiple exchanges, and using an average number over a calendar month 
will prevent gaming of the 390 order threshold.
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    \19\ Three hundred ninety orders is equal to the total number of 
orders that a person would place in a day if that person entered one 
order every minute from market open to close. Many of the largest 
retail-oriented electronic brokers offer lower commission rates to 
customers they define as ``active traders.'' Publicly available 
information from the websites for Charles Schwab, Fidelity, TD 
Ameritrade and optionsXpress all define an ``active trader'' as 
someone who executes only a few options trades per month. The 
highest required trading activity to qualify as an active trader 
among these four firms was 35 trades per quarter. See Securities 
Exchange Act Release 57254 at note 11 (which also notes that a study 
of one of the largest retail-oriented options brokerage firms 
indicated that on a typical trading day, options orders were entered 
with respect to 5922 different customer accounts. There was only one 
order entered with respect to 3765 of the 5922 different customer 
accounts on this day, and there were only 17 customer accounts with 
respect to which more than 10 orders were entered. The highest 
number of orders entered with respect to any one account over the 
course of an entire week was 27).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\20\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\21\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, 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. In 
particular, the proposal will assure that retail investors continue to 
receive the appropriate marketplace advantages in NYSE Amex 
marketplace, while furthering fair competition among marketplace 
professionals by treating them equally within the NYSE Amex 
marketplace.
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    \20\ 15 U.S.C. 78f(b).
    \21\ 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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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-2010-18 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-2010-18. 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 the filing will also be 
available for inspection and copying at 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-2010-18 and should be submitted 
on or before March 30, 2010.
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    \22\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-4909 Filed 3-8-10; 8:45 am]
BILLING CODE 8011-01-P