[Federal Register Volume 77, Number 78 (Monday, April 23, 2012)]
[Notices]
[Pages 24236-24239]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-9628]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66820; File No. SR-NYSEAmex-2012-22]


Self-Regulatory Organizations; NYSE Amex LLC; Notice of Filing of 
Proposed Rule Change Amending NYSE Amex Equities Rule 107B To Add a 
Class of Supplemental Liquidity Providers That Are Registered as Market 
Makers at the Exchange

April 17, 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 April 4, 2012, NYSE Amex LLC (``NYSE Amex'' or the ``Exchange'') 
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 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 amend NYSE Amex Equities Rule 107B to add 
a class of Supplemental Liquidity Providers (``SLP'') that are 
registered as market makers at 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 amend NYSE Amex Equities Rule 107B (``Rule 
107B''), which currently operates on a pilot basis, to add a class of 
SLPs that are registered as market makers at the Exchange.
Background
    Rule 107B, which was adopted as a pilot program in January 2010, 
established a new class of off-Floor market participants referred to as 
Supplemental Liquidity Providers or ``SLPs.'' \3\ Approved Exchange 
member organizations are eligible to be an SLP. SLPs supplement the 
liquidity provided by Designated Market Makers (``DMM''). SLPs have 
monthly quoting requirements that may qualify them to receive SLP 
rebates, which are larger than the general rebate available to non-SLP 
market participants.
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    \3\ See Securities Exchange Act Release No. 61308 (January 7, 
2010), 75 FR 2573 (January 5, 2010) (SR-NYSEAmex-2009-98) 
(establishing pilot program for market participants referred to as 
``Supplemental Liquidity Providers'' or ``SLPs.''), which is based 
on the SLP program of the New York Stock Exchange, LLC (``NYSE''). 
The pilot is currently scheduled to end on July 31, 2012.
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    The goal of the SLP program is to encourage participants to quote 
more often and to add displayed liquidity to the market. Thus, Rule 
107B(a) requires that an SLP maintain a bid and/or an offer at the NBB 
or NBO averaging at least 5% of the trading day for each assigned 
security. Meeting this quoting requirement will enable an SLP to 
receive the basic SLP rebate (currently $0.0032 per executed share) on 
security-by-security basis and to maintain their SLP status.\4\
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    \4\ The Exchange may, from time to time, change the amounts of 
the scaled SLP rebates by filing a proposed rule change under Rule 
19b-4(f)(2) of the Act. 17 CFR 240.19b-4(f)(2).
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    To qualify as an SLP under Rule 107B(c), a member organization is 
subject to a number of conditions, including adequate trading 
infrastructure to support SLP trading activity, quoting and volume 
performance that demonstrates an ability to meet the 5% average quoting 
requirement, and use of specified SLP mnemonics. In addition, the 
business unit of the member organization acting as an SLP must enter 
proprietary orders only and have adequate information barriers between 
the SLP unit and any member organization's customer,

[[Page 24237]]

research, and investment-banking business. Pursuant to Rule 
107B(g)(2)(A), a DMM may also be an SLP, but not in the same securities 
in which it is registered as a DMM.
    Rules 107B(d) and (e) currently set forth the application process 
and voluntary withdrawal process for SLPs. Rule 107B(f) sets forth how 
the quoting requirements are calculated. The assignment of SLP 
securities is set forth in Rule 107B(g). Rule 107B(h) specifies the 
entry of orders by SLPs, which may only be entered electronically from 
off the Floor of the Exchange from the proprietary account of the 
member organization.
    Rule 107B(i) imposes certain non-regulatory penalties if an SLP 
fails to meet the quoting requirements. Specifically, an SLP would not 
be able to earn a rebate unless it maintained a quote at the NBB or NBO 
an average of 5% of the trading day. An SLP is also at risk of losing 
its SLP status if it fails to meet the 5% quoting requirement for three 
consecutive months. Rule 107B(j) specifies the process for the appeal 
of any non-regulatory penalties.
Proposed SLP Market Makers
    The Exchange proposes to amend Rule 107B to add a category of SLPs 
that would be registered as market makers at the Exchange. As proposed, 
the term ``SLP'' would refer to member organizations that provide 
supplemental liquidity and there would be two classes of SLP. The 
existing SLP member organizations and associated requirements would 
continue unchanged and would be applicable to a new class of SLPs 
referred to as ``SLP-Prop.''
    The Exchange proposes to add a new class of SLP, referred to as 
``SLMM'', which would be registered as market makers at the Exchange. 
As proposed, the SLMMs would have differing qualification requirements 
and increased regulatory obligations as compared to SLP-Props, but 
would otherwise be subject to the existing SLP program. Because the 
Exchange proposes that the SLMMs would be subject to specified 
regulatory obligations, including the requirement to maintain a 
continuous two-sided quote, the Exchange believes that this class of 
registered market makers could be eligible for market maker treatment 
under federal rules,\5\ such as the close-out requirements for fail-to-
deliver positions applicable to market makers under Rule 204 of 
Regulation SHO.\6\
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    \5\ Among other things, a ``market maker'' is defined under the 
Securities Exchange Act of 1934 (the ``Act'') as ``any dealer who, 
with respect to a security, holds himself out (by entering 
quotations in an inter-dealer communication system or otherwise) as 
being willing to buy and sell such security for his own account on a 
regular or continuous basis.'' 15 U.S.C. 78c(a)(38).
    \6\ 17 CFR 242.204(a)(3).
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    As with the SLP program in general, SLMMs are intended to 
supplement the liquidity provided by DMMs, and are not intended to 
replace DMMs.\7\ The Exchange proposes to add SLMMs in order to assist 
in the maintenance of a fair and orderly market, as reasonably 
practicable. While all securities that trade at the Exchange are 
required to be assigned to a DMM, not all securities would be required 
to be assigned to an SLMM, which is how the SLP program operates today. 
The Exchange believes that the proposed rule change would expand the 
number of member organizations eligible to participate in the SLP 
program. In particular, it would enable member organizations that are 
registered as market makers on other exchanges that are not interested 
in joining the existing proprietary-only SLP program to join the SLP 
program.
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    \7\ The Exchange notes that NYSE Arca, Inc. (``NYSE Arca'') has 
two classes of market makers: Lead market makers and regular market 
makers. The proposed SLMM class would have obligations similar to 
those applicable to NYSE Arca regular market makers.
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    As set forth in the proposed amendment to Rule 107B(a), an SLP can 
choose to be either an SLP-Prop or an SLMM. As proposed, SLMMs would 
have different qualification requirements, specified regulatory 
obligations, expanded entry of order requirements, and a security-by-
security withdrawal ability. SLP-Props and SLMMs would be subject to 
the same application and overall program withdrawal process, quoting 
requirements, manner by which SLP securities are assigned, and non-
regulatory penalties. The Exchange does not propose to amend those 
aspects of the SLP program that would be applicable to both SLP-Props 
and SLMMs.\8\ For these purposes, the rule would continue to refer to 
``SLPs,'' which refers to both SLP-Prop and SLMM.
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    \8\ As part of the application process, a prospective SLP would 
make an election of whether it is seeking to be an SLP-Prop or SLMM. 
Based on this election, the Exchange would review the application 
for whether the SLP applicant meets the qualification requirements 
of Rule 107B(c) or proposed Rule 107B(d), as applicable. Current 
SLPs may also apply with the Exchange to convert to be an SLMM, 
provided that they meet proposed Rule 107B(d) qualification 
requirements.
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    As proposed, the qualification requirements specified in Rule 
107B(c) would be applicable and unchanged to SLP-Props. The Exchange 
proposes to add Rule 107B(d) to specify the qualification requirements 
of SLMMs, and re-number the rest of Rule 107B accordingly. As proposed, 
to be approved, an SLMM would need to meet the qualification 
requirements currently set forth in Rule 107B(c)(1), and (3)-(5), 
relating to requirements for adequate technology and performance 
history.
    If approved as an SLMM, an SLMM must meet specified regulatory 
obligations, which are set forth in proposed Rule 107B(d). Because 
these are regulatory obligations, failure to comply with these 
obligations could result in disciplinary action. First, pursuant to 
proposed Rule 107B(d)(1), the SLMM must maintain a continuous two-sided 
quotation in those securities in which the SLMM is registered to trade 
as an SLP (``Two-Sided Obligation''). As proposed, the Two-Sided 
Obligation applicable to SLMMs would be virtually identical to the 
market-maker two-sided obligations adopted by the equities markets in 
2010.\9\ Second, pursuant to proposed Rule 107B(d)(2), the SLMM would 
be required to maintain net capital in accordance with the provisions 
of Rule 15c3-1 under the Act, which specifies the capital requirements 
for market makers.\10\ Finally, pursuant to proposed Rule 107B(d)(3), 
the SLMM would be required to maintain unique mnemonics specifically 
dedicated to SLMM activity. Use of these unique mnemonics will enable 
SLMMs to meet their requirement under proposed Rule 107B(d)(1)(A) to 
identify their market-making activity to the Exchange. As proposed, 
such mnemonics may not be used for trading in securities other than SLP 
Securities assigned to the SLMM.\11\
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    \9\ See Securities Exchange Act Release No. 63255 (Nov. 5, 
2010), 75 FR 69484 (Nov. 12, 2010) (SR-BATS-2010-025; SR-BX-2010-66; 
SR-CBOE-2010-087; SR-CHX-2010-22; SR-FINRA-2010-049; SR-NASDAQ-2010-
115; SR-NSX-2010-12; SR-NYSE-2010-69; SR-NYSEAmex-2010-96; and SR-
NYSEArca-2010-83) (order approving enhanced quoting requirements for 
market makers).
    \10\ 17 CFR 240.15c3-1. For purposes of that rule, the term 
``market maker'' is defined as ``a dealer who, with respect to a 
particular security, (i) Regularly publishes bona fide, competitive 
bid and offer quotations in a recognized interdealer quotation 
system; or (ii) furnishes bona fide competitive bid and offer 
quotations on request; and (iii) is ready, willing and able to 
effect transactions in reasonable quantities at his quoted prices 
with other brokers or dealers.'' 17 CFR 240.15c3-1(c)(8).
    \11\ Because of the regulatory obligations associated with the 
SLMM Two-Sided Obligations, the Exchange believes that requiring 
dedicated, unique mnemonics for SLMM trading activity will enable 
SLMMs to comply with the proposed Rule 107B(d)(1)(A) requirement to 
identify such market-making quotes to the Exchange. The use of 
unique mnemonics will also facilitate the review by FINRA, on behalf 
of the Exchange and NYSE Regulation, Inc., of SLMM compliance with 
the Two-Sided Obligation.

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[[Page 24238]]

    Pursuant to Rule 107B(c)(6), SLPs must currently maintain adequate 
information barriers between the SLP unit and the member organization's 
customer, research and investment-banking business. This requirement 
ensures that the orders submitted by SLPs are proprietary only, and are 
not related to any customer-facing business, including potentially 
market-making businesses. The Exchange proposes to maintain this 
requirement for SLP-Props. However, because market making sometimes 
involves a customer-facing business, the Exchange does not believe that 
the information barrier requirement is necessary for the proposed 
SLMMs.\12\ Accordingly, the Exchange proposes that this qualification 
requirement be applicable only to the SLP-Prop class of SLPs.
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    \12\ The Exchange notes that other exchanges do not require 
information barriers for equities market makers. See, e.g., The 
NASDAQ Stock Market LLC (``Nasdaq'') Rules Series 4600 (Requirements 
for Nasdaq Market Makers and Other Nasdaq Market Center 
Participants) and NYSE Arca Equities Rule 7, Section 2 (Market 
Makers).
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    As a related matter, the Exchange proposes to amend Rule 107B(h) 
(as proposed Rule 107B(i)) to modify the entry of order requirements. 
SLP-Prop would continue to be required to enter proprietary orders 
only. As proposed, SLMMs would similarly be required to enter orders 
for their own account, however, they could be entered in either a 
proprietary capacity or a principal capacity on behalf of an affiliated 
or unaffiliated person. Accordingly, an SLMM could be submitting SLMM 
quotes to the Exchange on behalf of customers, or other unaffiliated or 
affiliated persons.
    The Exchange proposes to add an additional ability for SLMMs to 
voluntarily withdraw from registration as a market maker in a 
particular security. In proposed Rule 107B(f)(2), the Exchange proposes 
that an SLMM may withdraw its registration in a security by giving 
written notice to the SLP Liaison Committee and FINRA. As proposed, the 
Exchange may require a certain minimum notice period for withdrawal, 
and may place such other conditions on withdrawal and re-registration 
following withdrawal, as it deems appropriate in the interests of 
maintaining fair and orderly markets. An SLMM that fails to give 
advanced written notice of termination to the Exchange may be subject 
to formal disciplinary action.
    The Exchange believes that the security-by-security withdrawal 
provision will enable SLMMs to comply with legal or regulatory 
requirements that may conflict with meeting the SLMM requirements. For 
example, permitting an SLMM to withdraw its quotations may enable it to 
meet otherwise conflicting obligations under Rule 104 of Regulation 
M.\13\ In particular, because the Exchange will always have a DMM 
assigned to a security, the Exchange believes that having a flexible 
policy toward withdrawal of registration in a security will not harm 
investors. Moreover, the proposed rule is identical to that of another 
exchange.\14\
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    \13\ 17 CFR 242.104 (setting forth restrictions on entering 
stabilizing bids or penalty bids in connection with an offering of 
any security).
    \14\ The proposed rule is based on BATS Exchange, Inc. 
(``BATS'') Rule 11.7(b). As noted below, a number of self-regulatory 
organizations have similar provisions, with varying language.
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    The final proposed change to the SLP rule is to add to Rule 107B(g) 
(as proposed Rule 107B(h)) that an SLP-Prop may not also act as an SLMM 
in the same securities in which it is registered as an SLP-Prop and 
vice versa. The Exchange believes that under the SLP program, a member 
organization should be either an SLP-Prop or SLMM. However, if a member 
organization has more than one business unit, and the SLP-Prop business 
unit is walled off from the SLMM business unit, the member organization 
may engage in both an SLP-Prop and SLMM business from those different 
business units. Provided there is no coordinated trading between the 
SLP-Prop and SLMM business units, they may be assigned the same 
securities.
    The Exchange proposes to implement the changes to the SLP program 
by adding the SLMM class effective on the first day of the month 
following Commission approval of this proposal.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange. In particular, 
the Exchange believes that its proposal is consistent with Section 6(b) 
of the Act,\15\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\16\ in particular, because 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.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that adding an additional registered market 
maker program to the Exchange will promote just and equitable 
principles of trade as it could potentially expand the number of market 
participants trading at the Exchange that would be required to assist 
in the maintenance of a fair and orderly market, as reasonably 
practicable. In particular, the current SLP program is limited solely 
to member organizations that trade for their own account, and that are 
walled off from any customer-facing business. With the proposed rule 
change, additional market participants, including member organizations 
that are registered as market makers on other exchanges that engage in 
a customer-facing business, would be able to participate in the SLP 
program.
    As noted above, the Exchange would continue to require that a DMM 
be registered in every security at the Exchange, and similar to NYSE 
Arca's market maker program, which has two classes of market maker, the 
SLMMs would provide supplemental liquidity in addition to the DMMs. 
Because the proposed SLMMs would be required to meet the Two-Sided 
Obligation applicable to all equities market makers, the Exchange 
believes that the proposed rule change would also remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system by increasing the number of market participants that are 
required to maintain a continuous two-sided quotation in the securities 
in which they are registered. The Exchange further believes that adding 
additional registered market makers would protect investors and the 
public interest by providing additional sources of liquidity for 
trading.
    In addition, the Exchange believes that the proposed rule change is 
consistent with the requirements of the Act because the proposed 
requirements for the SLMMs are based on existing, approved requirements 
for registered market makers on other exchanges. In addition to the 
Two-Sided Obligation, the proposed SLMMs would also be required to 
assist in the maintenance of a fair and orderly market, as reasonably 
practicable, and maintain net capital consistent with federal 
requirements for market makers.

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

[[Page 24239]]

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 45 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 or disapprove the 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 email to [email protected]. Please include 
File Number SR-NYSEAmex-2012-22 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-2012-22. 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 such 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 publicly available. All 
submissions should refer to File Number SR-NYSEAmex-2012-22 and should 
be submitted on or before May 14, 2012.
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    \17\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-9628 Filed 4-20-12; 8:45 am]
BILLING CODE 8011-01-P