[Federal Register Volume 77, Number 35 (Wednesday, February 22, 2012)]
[Notices]
[Pages 10586-10589]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-4003]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66397; File Nos. SR-NYSE-2011-56; SR-NYSEAmex-2011-86]


Self-Regulatory Organizations; New York Stock Exchange LLC; NYSE 
Amex LLC; Order Instituting Proceedings To Determine Whether To 
Disapprove Proposed Rule Changes To Codify Certain Traditional Trading 
Floor Functions That May Be Performed by Designated Market Makers and 
To Permit Designated Market Makers and Floor Brokers Access to 
Disaggregated Order Information

February 15, 2012.

I. Introduction

    On October 31, 2011, the New York Stock Exchange LLC (``NYSE'') and 
NYSE Amex LLC (``NYSE Amex'') (collectively, the ``SROs'') each filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') 
\1\ and Rule 19b-4 thereunder,\2\ proposed rule changes (the ``SRO 
Proposals'') to amend certain of their respective rules relating to 
Designated Market Makers (``DMMs'') \3\ and Floor brokers. The SRO 
Proposals were published for comment in the Federal Register on 
November 17, 2011.\4\ The Commission received no comment letters on the 
proposals.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See NYSE Rule 98(b)(2). ``DMM unit'' means any member 
organization, aggregation unit within a member organization, or 
division or department within an integrated proprietary aggregation 
unit of a member organization that (i) has been approved by NYSE 
Regulation pursuant to section (c) of NYSE Rule 98, (ii) is eligible 
for allocations under NYSE Rule 103B as a DMM unit in a security 
listed on the Exchange, and (iii) has met all registration and 
qualification requirements for DMM units assigned to such unit. The 
term ``DMM'' means any individual qualified to act as a DMM on the 
Floor of the Exchange under NYSE Rule 103. See also NYSE Amex 
Equities Rule 2(i). Rule 2(i) defines the term ``DMM'' to mean an 
individual member, officer, partner, employee or associated person 
of a DMM unit who is approved by the Exchange to act in the capacity 
of a DMM. NYSE Amex Equities Rule 2(j) defines the term ``DMM unit'' 
as a member organization or unit within a member organization that 
has been approved to act as a DMM unit under NYSE Amex Equities Rule 
98.
    \4\ Securities Exchange Act Release Nos. 65735 (November 10, 
2011), 76 FR 71405 (SR-NYSEAmex-2011-86) and 65736 (November 10, 
2011), 76 FR 71399 (SR-NYSE-2011-56).
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    On December 22, 2011, the Commission extended the time period in 
which to either approve the SRO Proposals, disapprove the SRO 
Proposals, or to institute proceedings to determine whether to 
disapprove the

[[Page 10587]]

SRO Proposals, to February 15, 2012.\5\ This order institutes 
proceedings under Section 19(b)(2)(B) of the Act to determine whether 
to disapprove the SRO Proposals.
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    \5\ See Securities Exchange Act Release No. 66036, 76 FR 82011 
(December 29, 2011).
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II. Description of the Proposals

    The SRO Proposals seek to amend the SROs' rules in several ways. 
First, the SROs propose to codify certain Trading Floor functions that 
may be performed by DMMs. Second, the SROs propose to allow DMMs to 
access Exchange systems that would provide DMMs with additional order 
information about the securities in which they are registered. Third, 
the SROs propose to make certain conforming amendments to their rules 
to reflect the additional order information that would be available to 
DMMs through Exchange systems, and to specify what information about e-
Quotes is available to the DMM. Finally, the SROs propose to modify the 
terms under which DMMs would be permitted to provide market information 
to Floor brokers and others.

A. Trading Floor Functions

    The SROs propose to codify certain Trading Floor functions formerly 
performed by specialists that are to be performed by DMMs, and were 
described in each SRO's respective Floor Official Manual.\6\
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    \6\ See 2004 Floor Official Manual, Market Surveillance June 
2004 Edition, Chapter Two, Section I.
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    The proposed rules would specify four categories of Trading Floor 
functions that DMMs could perform: (1) Maintaining order among Floor 
brokers manually trading at the DMM's assigned panel; \7\ (2) bringing 
Floor brokers together to facilitate trading; \8\ (3) assisting Floor 
brokers with respect to their orders by providing information regarding 
the status of a Floor broker's orders, helping to resolve errors or 
questioned trades, adjusting errors, and cancelling or inputting Floor 
broker agency interest on behalf of a Floor broker; \9\ and (4) 
researching the status of orders or questioned trades.\10\
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    \7\ See id. at Section I.A. at 7 (``specialist helps ensure that 
such markets are fair, orderly, operationally efficient and 
competitive with all other markets in those securities'').
    \8\ See id. at Section I.B.3. at 10-11 (``[i]n opening and 
reopening trading in a listed security, a specialist should * * * 
[s]erve as the market coordinator for the securities in which the 
specialist is registered by exercising leadership and managing 
trading crowd activity and promptly identifying unusual market 
conditions that may affect orderly trading in those securities, 
seeking the advice and assistance of Floor Officials when 
appropriate'' and ``[a]ct as a catalyst in the markets for the 
securities in which the specialist is registered, making all 
reasonable efforts to bring buyers and sellers together to 
facilitate the public pricing of orders, without acting as principal 
unless reasonably necessary'').
    \9\ See id. at Section I.B.4. at 11 (``In view of the 
specialist's central position in the Exchange's continuous two-way 
agency auction market, a specialist should proceed as follows * * * 
[e]qually and impartially provide accurate and timely market 
information to all inquiring members in a professional and courteous 
manner.'').
    \10\ See id. at Section I.B.5. at 12 (A specialist should 
``[p]romptly provide information when necessary to research the 
status of an order or a questioned trade and cooperate with other 
members in resolving and adjusting errors.'').
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B. DMM Access to Additional Order Information

    Each SRO proposes to make systems available to a DMM at the post 
that display the following types of information about securities in 
which the DMM is registered: (A) Aggregated information about buying 
and selling interest; \11\ (B) disaggregated information about the 
price and size of any individual order or Floor broker agency interest 
file (also known as ``e-Quotes),'' and the entering and clearing firm 
information for such orders, except that Exchange systems would not 
make available to DMMs information about any order or e-Quote, or 
portion thereof, that a market participant has elected not to display 
to a DMM; and (C) post-trade information.\12\ The proposals would make 
available to DMMs disaggregated information about the following 
interest in securities in which the DMM is registered: (a) The price 
and size of all displayable interest submitted by off-Floor 
participants; and (b) all e-Quotes, including reserve e-Quotes, that 
the Floor broker has not elected to exclude from availability to the 
DMM.\13\
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    \11\ Exchange systems currently make available to DMMs aggregate 
information about the following interest in securities in which the 
DMM is registered: (a) All displayable interest submitted by off-
Floor participants; (b) all Minimum Display Reserve orders, 
including the reserve portion; (c) all displayable Floor broker 
agency interest files (``e-Quotes''); (d) all Minimum Display 
Reserve e-Quotes, including the reserve portion; and (e) the reserve 
quantity of Non-Display Reserve e-Quotes, unless the Floor broker 
elects to exclude that reserve quantity from availability to the 
DMM.
    \12\ For the latter two categories, the DMM also would have 
access to entering and clearing firm information for each order and, 
as applicable, the badge number of the Floor broker representing the 
order. According to the SROs, the systems would not contain any 
information about the ultimate customer (i.e., the name of the 
member or member organization's customer) in a transaction.
    \13\ The SROs previously permitted DMMs to have access to 
Exchange systems that contained the disaggregated order information 
described above. The SROs stopped making such information available 
to DMMs on January 19, 2011. See NYSE and NYSE Amex Information Memo 
11-03.
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C. Conforming Amendments and Floor Broker e-Quote Information

    The SROs also propose to make conforming amendments to their rules 
to reflect the additional order information that would be available to 
DMMs through Exchange systems, and to specify what information about e-
Quotes is available to the DMM. Specifically, the SROs propose to 
revise NYSE Rule 70 and NYSE Amex Rule 70 governing Floor broker e-
Quotes to reflect that disaggregated order information would be 
available to the DMM except as elected otherwise. The SROs would allow 
a Floor broker to enter e-Quotes with reserve interest (``Reserve e-
Quote'') with or without a displayable portion.
    A Reserve e-Quote with a displayable portion would participate in 
manual and automatic executions. Order information at each price point, 
including the reserve portion, would be included in the aggregate 
interest available to the DMM. Order information at each price point 
would be available to the DMM on a disaggregated basis as well. If the 
Floor broker chooses to exclude the Reserve e-Quote with a displayable 
portion from the DMM, then the DMM would have access to the entire 
portion on an aggregated basis but would not have access to any of that 
interest on a disaggregated basis.
    A Floor broker Reserve e-Quote with an undisplayable portion would 
also participate in manual and automatic executions. Like the Reserve 
e-Quote with a displayable portion, order information at each price 
point would be included in the aggregate interest available to DMM. 
Again, like the Reserve e-Quote with a displayable portion, order 
information at each price point would be available to DMM on a 
disaggregated basis as well. If the Floor broker chooses to exclude the 
Reserve e-Quote with an undisplayable portion from the DMM, however, 
then the DMM would not have access to such interest on either an 
aggregated basis or a disaggregated basis. Such interest would not 
participate in manual executions.
    In addition, the SROs propose to delete rules which currently 
prohibit DMMs from using the Display Book system to access information 
about Floor broker agency interest excluded from the aggregated agency 
interest and Minimum Display Reserve Order information, other than for 
the purpose of effecting transactions that are reasonably imminent 
where such Floor broker agency and Minimum Display

[[Page 10588]]

Reserve Order interest information is necessary to effect such 
transaction.\14\
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    \14\ See proposed deletions to NYSE Rule 104(a)(6) and NYSE Amex 
Rule 104(a)(b).
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D. Ability of DMMs To Provide Market Information on the Trading Floor

    The SROs also propose to modify the manner under which DMMs would 
be permitted to provide market information to Floor brokers and 
visitors on the Trading Floor. Specifically, the proposed rules would 
permit a DMM to provide the market information to which he or she has 
access to a: (1) Floor broker in response to an inquiry in the normal 
course of business; or (2) visitor to the Trading Floor for the purpose 
of demonstrating methods of trading. As such, Floor brokers would be 
able to access disaggregated order information that market participants 
have not otherwise elected to be hidden from the DMM. A Floor broker 
would not be able to submit such an inquiry for market information by 
electronic means, and the DMM's response containing market information 
could not be through electronic means.
    Because the proposed rule expands on and incorporates the current 
SRO rules regarding disclosure of order information by DMMs, the SROs 
are proposing to delete these rules.\15\ The current rules provide that 
a DMM may disclose market information for three purposes. First, a DMM 
may disclose market information for the purpose of demonstrating the 
methods of trading to visitors to the Trading Floor. This aspect of the 
current rule is replicated in the proposed rules. Second, a DMM may 
disclose market information to other market centers in order to 
facilitate the operation of the Intermarket Trading System (``ITS''). 
According to the SROs, this text is obsolete as the ITS Plan has been 
eliminated and therefore the SROs are proposing to delete it. Third, a 
DMM may, while acting in a market making capacity, provide information 
about buying or selling interest in the market, including (a) 
aggregated buying or selling interest contained in Floor broker agency 
interest files other than interest the broker has chosen to exclude 
from the aggregated buying and selling interest, (b) aggregated 
interest of Minimum Display Reserve Orders and (c) the interest 
included in DMM interest files, excluding Capital Commitment Schedule 
(``CCS'') interest as described in Rule 1000(c), in response to an 
inquiry from a member conducting a market probe in the normal course of 
business.
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    \15\ The SROs are also proposing conforming amendments to 
correct cross-references to the former rule.
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    The proposed rules would permit DMMs to provide Floor brokers not 
only with the same aggregated order information that DMMs currently are 
permitted to provide under current rules, but also with the 
disaggregated and post-trade order information described above.\16\ In 
the SROs' view, broadening the scope of information that DMMs can 
provide Floor brokers would assist DMMs with carrying out their 
historical function of bringing Floor brokers together to facilitate 
trading.\17\ The SROs believe, among other things, that providing Floor 
brokers access to disaggregated order information would increase their 
ability to source liquidity and provide price discovery for block 
transactions.
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    \16\ Because DMMs on the Trading Floor do not have access to CCS 
interest information, the proposed rule does not specify that DMMs 
would not be disseminating such information.
    \17\ According to the SROs, prior to adoption of the Hybrid 
Market, Exchange specialists historically had been permitted to 
provide disaggregated order information to Floor brokers.
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    The proposed rules would permit a DMM to provide market information 
to a Floor broker in response to a specific request by the Floor broker 
to the DMM at the post, rather than specifying that the information 
must be provided ``in response to an inquiry from a member conducting a 
market probe in the normal course of business,'' as currently provided 
in the SRO rules. According to the SROs, the term ``market probe'' no 
longer accurately reflects the manner in which DMMs and Floor brokers 
interact on the Trading Floor. Rather, the SROs stated that the Floor 
broker's normal course of business, as an agent for customers, includes 
both seeking market probes into the depth of the market as well as 
seeking out willing contra-side buyers and sellers in a particular 
security. Under the proposed rule change, Floor brokers would not have 
access to Exchange systems that provide disaggregated order 
information, and they would only be able to access such market 
information through a direct interaction with a DMM at the post.

III. Proceedings To Determine Whether To Disapprove SR-NYSE-2011-56 and 
SR-NYSEAmex-2011-86 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act to determine whether the SRO Proposals should be 
disapproved. Institution of such proceedings is appropriate at this 
time in view of the legal and policy issues raised by the SRO Proposals 
that are discussed below. Institution of disapproval proceedings does 
not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described in greater 
detail below, the Commission seeks and encourages interested persons to 
provide additional comment on the SRO Proposals.
    Pursuant to Section 19(b)(2)(B), the Commission is providing notice 
of the grounds for disapproval under consideration. In particular, 
Section 6(b)(5) of the Act \18\ requires that the rules of an exchange 
be designed, among other things, 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 addition, Section 6(b)(5) 
prohibits the rules of an exchange from being designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
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    \18\ 15 U.S.C. 78f(b)(5).
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    As the Commission has previously recognized, the participation of 
market makers in exchange markets may benefit public customers by 
promoting more liquid and efficient trading, and an exchange may 
legitimately confer benefits on market participants willing to accept 
substantial responsibilities to contribute to market quality.\19\ While 
the rules of an exchange may confer special or unique benefits upon 
certain types of participants, however, such rules still must ensure, 
among other things, that investors and the public interest are 
protected.\20\ Accordingly, the Commission carefully reviews trading 
rule proposals that seek to offer special advantages to market makers 
and others. Although an exchange may reward such participants for the 
benefits they provide to the exchange's market, such rewards must not 
be disproportionate to the services provided.\21\
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    \19\ See, e.g., Securities Exchange Act Release No. 58845 
(October 24, 2008), 73 FR 64379 (October 29, 2008) (SR-NYSE-2008-46) 
(``New Market Model Order''), at 64388. See also Securities Exchange 
Act Release No. 58092 (July 3, 2008), 73 FR 40144 (July 11, 2008) at 
40148.
    \20\ See New Market Model Order at 64388. See also 15 U.S.C. 
78f(b)(5).
    \21\ See New Market Model Order at 64388. At the time NYSE 
adopted its New Market Model, the Commission believed that the rules 
reflected ``an appropriate balance of DMM obligations against the 
benefits provided to DMMs under [the] proposal.'' Id.
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    In their proposals, the SROs take the position that providing DMMs 
with disaggregated order information would

[[Page 10589]]

assist them in carrying out their trading floor functions, such as 
maintaining order among Floor brokers manually trading at the DMM's 
assigned panel, bringing Floor brokers together to facilitate trading, 
assisting Floor brokers with respect to their orders, and researching 
the status of orders or questioned trades. The SROs also believe that 
providing this information to Floor brokers would serve a valuable 
function by increasing the ability of Floor brokers to source liquidity 
and provide price discovery for block transactions.
    While the SRO proposals may improve the ability of DMMs and Floor 
brokers to trade on the SROs, they also would provide DMMs and Floor 
brokers access to potentially valuable information about individual 
orders on the SROs that is not available to other exchange members or 
market participants. This information would include the price and size 
of individual orders on the SROs, as well as the entering and clearing 
firm for such orders. It also would include information about trading 
interest that is not available to other exchange members or market 
participants even in aggregated form, such as Floor broker Reserve e-
Quotes (unless there has been an affirmative election to withhold this 
information). As noted above, while the Commission has recognized that 
exchanges may legitimately confer special benefits on market 
participants willing to accept substantial responsibilities to 
contribute to market quality, such benefits must not be 
disproportionate to the services provided. In this case, the SROs have 
not proposed to require of DMMs or Floor brokers any additional 
obligations to the market that might correspond to the proposed 
informational benefits.\22\ Nor have the SROs clearly explained how the 
proposals might materially improve the quality of the SROs' markets, 
particularly given the increasing amount of automated transactions on 
the SROs and the reduced role of the Exchange floors. As a result, the 
Commission is concerned that the SROs' proposals, among other things, 
may unfairly discriminate in favor of DMMs and Floor brokers, may not 
be designed to protect the broad group of investors that trade on the 
SROs, and otherwise may be inequitable.
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    \22\ The Commission further notes that, while DMMs have certain 
special obligations to the SROs, including those relating to the 
maintenance of a fair and orderly market, Floor brokers do not have 
similar obligations.
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    The Commission therefore believes that questions remain as to 
whether the SRO Proposals are consistent with the requirements of 
Sections 6(b)(5) of the Act, including whether they would promote just 
and equitable principles of trade, perfect the mechanism of a free and 
open market and the national market system, protect investors and the 
public interest, and not permit unfair discrimination.

IV. Solicitation of Comments

    The Commission requests that interested persons provide written 
submissions of their views, data and arguments with respect to the 
concerns identified above, as well as any others they may have with the 
SRO Proposals. In particular, the Commission invites the written views 
of interested persons concerning whether the SRO Proposals are 
inconsistent with Section 6(b)(5) or any other provision of the Act, or 
the rules and regulation thereunder. Although there do not appear to be 
any issues relevant to approval or disapproval which would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\23\
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    \23\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views and 
arguments regarding whether the SRO Proposals should be disapproved by 
March 14, 2012. Any person who wishes to file a rebuttal to any other 
person's submission must file that rebuttal by March 28, 2012. 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 Numbers SR-NYSE-2011-56 and SR-NYSEAmex-2011-86 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 Numbers SR-NYSE-2011-56 and SR-
NYSEAmex-2011-86. These file numbers 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 SRO Proposals 
that are filed with the Commission, and all written communications 
relating to the SRO Proposals 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 filings also will be 
available for inspection and copying at the principal office of the 
Exchanges. 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 Numbers SR-
NYSE-2011-56 and SR-NYSEAmex-2011-86 and should be submitted on or 
before March 14, 2012. Rebuttal comments should be submitted by March 
28, 2012.
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    \24\ 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-4003 Filed 2-21-12; 8:45 am]
BILLING CODE 8011-01-P