[Federal Register Volume 77, Number 33 (Friday, February 17, 2012)]
[Notices]
[Pages 9719-9721]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-3738]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66385; File No. SR-NYSEAmex-2012-03]


Self-Regulatory Organizations; NYSE Amex LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Provide for 
``Self-Trade Prevention'' on the Exchange

February 13, 2012.
    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 January 30, 2012, 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 Exchange. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to add new Commentary .02 to NYSE Amex 
Options Rule 964NY (Display, Priority and Order Allocation--Trading 
Systems) to provide for ``Self-Trade Prevention'' on the Exchange. The 
text of the proposed rule change is available at the Exchange, the 
Commission's Public Reference Room, and 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to add new Commentary .02 to NYSE Amex 
Options Rule 964NY (Display, Priority and Order Allocation--Trading 
Systems) to provide for ``Self-Trade Prevention'' on the Exchange.\3\ 
As proposed, the Exchange would cancel any resting Market Maker 
quote(s) and order(s) \4\ to buy (sell) that are priced equal to or 
higher (lower) than an incoming Market Maker quote, order or both to 
sell (buy) entered under the same trading permit identification.\5\ The 
following examples illustrate how Self-Trade Prevention would function:
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    \3\ Self-Trade Prevention would only be applicable to electronic 
trading on the Exchange.
    \4\ The Exchange will specify from time to time via a Regulatory 
Information Bulletin the Market Maker trading interest (i.e., quotes 
and orders) to which Self-Trade Prevention will apply. Currently, 
the Exchange plans to initially apply Self-Trade Prevention to the 
following order types used by Market Makers: ``PNP Orders'' and 
``PNP-Blind Orders.'' PNP Orders and PNP-Blind Orders are defined in 
NYSE Amex Options Rule 900.3NY, and each is a type of non-routable 
Limit Order that is only executed on the Exchange. The Exchange 
notes that Market Makers primarily use these order types, as opposed 
to other order types offered by the Exchange, because they are 
similar to quotes (i.e., they are non-routable Limit Orders). The 
Exchange currently plans to expand Self-Trade Prevention to other 
Market Maker trading interest (e.g., quotes) when certain technology 
changes have been completed, and would announce any such expansion 
through a Regulatory Information Bulletin under this proposed rule 
change pursuant to Commentary .02 of NYSE Amex Options Rule 964NY. 
In the future, the Exchange may expand Self-Trade Prevention to 
other orders used by Market Makers (including routable orders), and 
it also would announce any such changes through a Regulatory 
Information Bulletin under this proposed rule change pursuant to 
Commentary .02 of NYSE Amex Options Rule 964NY. The Exchange would 
submit a separate proposed rule change if it were to make Self-Trade 
Prevention available to non-Market Maker trading interest.
    \5\ The Exchange would use a Market Maker's trading permit 
identification (``TPID'') to monitor for self-trades in the proposed 
Self-Trade Prevention functionality. TPIDs are assigned to Market 
Makers, as well as other ATP Holders, to identify them in the 
Exchange's systems. Market Makers on the Exchange are not able to 
submit orders on an agency basis. Thus, a Market Maker within a firm 
that conducts both an agency and market making business would have a 
unique TPID that could only be used for that Market Maker's quotes 
and orders.
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Example 1
    [ssquf] The National Best Bid and Offer (``NBBO'') for a particular 
option series is $1.15 (bid)--$1.20 (offer);
    [ssquf] The Exchange Best Bid and Offer (``BBO'') is $1.15 (bid)--
$1.25 (offer);
    [ssquf] A Market Maker has a single resting PNP Order to buy on the 
Exchange's Consolidated Book with a price of $1.15;
    [ssquf] If the Market Maker submits a PNP Order to sell with a 
price of $1.15, the NYSE Amex System would cancel the Market Maker's 
resting PNP Order to buy with a price of $1.15.\6\
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    \6\ Example 1 illustrates that Self-Trade Prevention would 
result in the cancellation of the Market Maker's resting order (or 
quote) to buy regardless of whether the incoming order (or quote) 
and the resting order (or quote) would actually execute against each 
other.
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Example 2
    [ssquf] The NBBO and BBO are the same as in Example 1;
    [ssquf] A Market Maker has two separate resting PNP Orders to buy 
on the Exchange's Consolidated Book, with prices of $1.15 and $1.13, 
respectively;
    [ssquf] If the Market Maker submits a PNP Order to sell with a 
price of $1.14, the NYSE Amex System would cancel the Market Maker's 
resting PNP Order to buy with a price of $1.15, but would not cancel 
the Market Maker's resting PNP Order to buy with a price of $1.13.\7\
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    \7\ Example 2 illustrates that Self-Trade Prevention would not 
result in the cancellation of the Market Maker's resting order (or 
quote) to buy with a price of $1.13 because the price of the resting 
order (or quote) to buy is lower than the price of the incoming 
order (or quote) to sell.
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    As proposed, Self-Trade Prevention would be in effect throughout 
the trading day for all Market Markers on the Exchange,\8\ but not 
during Trading Auctions.\9\ In this regard, the Exchange believes that 
it is highly unlikely that a Market Maker would trade against its own 
resting interest during a Trading Auction. Moreover, the Exchange notes 
that it would be difficult to implement this functionality from a 
technological and operational perspective because it would require the 
Exchange to cancel resting, executable Market Maker trading interest as 
it is calculating the price at which to conduct the Trading Auction. 
For these reasons, the Exchange is not applying Self-Trade Prevention 
to Trading Auctions.
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    \8\ Market Markers on the Exchange would not have the ability to 
deactivate Self-Trade Prevention or change any settings related to 
it.
    \9\ See, e.g., NYSE Amex Options Rule 952NY.
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    The Exchange also proposes that Self-Trade Prevention would not be 
applicable to individual legs of Complex Orders.\10\ In this regard, 
senders of Complex Orders, including Market Makers, view them as 
discrete orders, serving a particular investment purpose, that are 
contingent on all of the legs of the Complex Order being executed. 
Thus, they are only interested in having all of the legs of a Complex 
Order executed. Because the non-execution of

[[Page 9720]]

one leg of a Complex Order is contrary to the investment purpose of the 
Complex Order, the Exchange has determined to not apply Self-Trade 
Prevention in a manner that would prevent a Complex Order sent by a 
Market Maker from executing against that Market Maker's resting 
interest in the leg markets.
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    \10\ See NYSE Amex Options Rule 900.3NY(e), which defines 
Complex Order. See also NYSE Amex Options Rule 980NY, which 
describes electronic Complex Order trading.
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    The Exchange notes that Self-Trade Prevention would not relieve or 
modify a Market Maker's obligations under the Exchange's Rules, such as 
the Market Maker's quoting obligations, or any other rules and 
regulations to which the Market Maker is subject.
    The Exchange believes that the proposed Self-Trade Prevention is 
very similar to functionality currently offered by the Nasdaq Options 
Market (``NOM''). In particular, NOM provides market makers on its 
market with an ``anti-internalization'' functionality, whereby quotes 
and orders entered by NOM market makers using the same market 
participant identifier will not be executed against quotes and orders 
entered on the opposite side of the market by the same market maker 
using the same identifier, but instead the NOM system will cancel the 
oldest of the quotes or orders back to the entering party prior to 
execution.\11\ Similarly, the Chicago Board Options Exchange (``CBOE'') 
provides for a market-maker trade prevention order, which is a market 
maker immediate-or-cancel order that, if it would trade against a 
resting quote or order for the same market-maker, is cancelled along 
with the resting quote or order.\12\ Additionally, NYSE Arca Equities 
provides for a self trade prevention order modifier that prevents 
orders so designated from executing against resting opposite side 
orders entered under the same equity trading permit identification that 
are also designated with the modifier.\13\ The change proposed herein 
would therefore provide Market Makers with a method of managing their 
trading interest that is similar to functionalities that are currently 
available on other markets.
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    \11\ See Chapter VI, Section 10(6) of the NOM Rules.
    \12\ See CBOE Rule 6.53(c)(v).
    \13\ See NYSE Arca Equities Rule 7.31(qq). Similar to the Self-
Trade Prevention functionality proposed in this filing, the NYSE 
Arca Equities Self Trade Prevention modifier is not in effect during 
auctions.
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    Because of the technology changes associated with this proposed 
rule change, the Exchange proposes to announce the implementation date 
of Self-Trade Prevention on the Exchange via a Regulatory Information 
Bulletin. This Bulletin also would include the Market Maker trading 
interest to which Self-Trade Prevention initially would apply.\14\
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    \14\ See supra note 4. As mentioned above, the Exchange notes 
that any such announcements regarding Self-Trade Prevention would 
not be for the purpose of, or permit the Exchange to, expand the 
applicability of Self-Trade Prevention beyond Market Maker trading 
interest. Any such expansion would be the subject of a separate 
proposed rule change submitted by the Exchange to the Commission. 
The Exchange further notes that the Commission has previously 
permitted other option exchanges to communicate settings or 
eligibility for various exchange mechanisms to their members through 
exchange notices, bulletins or circulars. See, e.g., Interpretation 
and Policy .05 to CBOE Rule 6.74A, which provides that any 
determinations made by CBOE regarding CBOE's Automated Improvement 
Mechanism, such as eligible classes, order size parameters and the 
minimum price increment for certain responses, shall be communicated 
in a Regulatory Circular. See also CBOE Rules 6.45A and 6.45B, which 
provide that CBOE will issue a Regulatory Circular to specify 
certain priority-related information, including specifying which 
priority rules will govern which classes of options any time the 
exchange changes the priority.
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2. Statutory Basis
    As discussed above, the Exchange believes that the proposed rule 
change is designed to promote just and equitable principles of trade 
because it would provide Market Makers with a functionality to manage 
their trading interest that is similar to functionalities currently 
available on other markets.\15\ Additionally, the Exchange believes 
that the proposed rule change is designed to prevent fraudulent and 
manipulative acts and practices, to 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, because 
it would allow Market Makers to better manage their trading interest 
and provide a means to prevent executions against their own trading 
interest. The Exchange notes that Market Makers have asked for this 
functionality to prevent them from inadvertently trading with their own 
interest. In such a situation, the firms ask the Exchange to nullify 
the trades, which they are permitted to do under the Exchange's rules 
because they are on both sides of the trades.\16\ While the proposed 
Self-Trade Prevention functionality would prevent inadvertent self-
trading, the Exchange notes that the functionality would also prevent 
intentional self-trading. In this regard, the proposed rule change 
provides a means to prevent manipulative conduct such as ``wash 
trading.''
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    \15\ See supra notes 11, 12 and 13.
    \16\ Under Commentary .02 to NYSE Amex Options Rule 965NY, a 
``trade may be nullified if all parties to the trade agree to the 
nullification,'' and when ``all parties to a trade have agreed to a 
trade nullification, one party must promptly notify the Exchange for 
dissemination of cancellation information to the Options Price 
Reporting Authority.''
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    Presently, the Exchange is proposing that Self-Trade Prevention be 
applicable only for Market Makers. The Exchange has made this decision 
because Market Makers are the most likely market participants to 
execute against their own trading interest. The Exchange may propose to 
expand the Self-Trade Prevention functionality to other ATP Holders in 
the future, subject to being in a position to implement the 
functionality in a manner consistent with a firm's agency 
responsibilities to its customer orders. Accordingly, the Exchange 
believes that the proposed rule change is not designed to permit unfair 
discrimination.
    For the reasons set forth above, the Exchange believes that the 
proposed rule change is consistent with Section 6(b) of the Securities 
Exchange Act of 1934 (the ``Act''),\17\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\18\ in particular.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 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

    Because the foregoing proposed rule change does not significantly 
affect the protection of investors or the public interest, does not 
impose any significant burden on competition, and, by its terms, does 
not become operative for 30 days from the date on which it was filed, 
or such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \19\ and Rule 19b-
4(f)(6) thereunder.\20\
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the Exchange to give the Commission written notice of the 
Exchange's 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 of the proposed rule 
change, or such shorter time as designated by the Commission. The 
Exchange has satisfied the five-day prefiling requirement.

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[[Page 9721]]

    The Exchange has requested that the Commission waive the 30-day 
operative delay. The Commission believes that waiver of the operative 
delay is consistent with the protection of investors and the public 
interest because the proposal will provide a tool for Exchange market 
makers to better manage their trading interest and provide a means to 
prevent manipulative conduct such as ``wash trading.'' Therefore, the 
Commission designates the proposal operative upon filing.\21\
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    \21\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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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 email to [email protected]. Please include 
File Number SR-NYSEAmex-2012-03 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-2012-03. 
This file number should be included on the subject line if email 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 also will be available 
for inspection and copying at the principal office of the Exchange. 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-2012-03 and should 
be submitted on or before March 9, 2012.

    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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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-3738 Filed 2-16-12; 8:45 am]
BILLING CODE 8011-01-P