[Federal Register Volume 77, Number 111 (Friday, June 8, 2012)]
[Notices]
[Pages 34115-34117]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-13893]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67101; File No. SR-NYSEArca-2012-48]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change Amending NYSE Arca Equities Rule 7.31(h) To Add 
a PL Select Order Type

June 4, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on May 22, 2012, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE 
Arca'') 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 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 Arca Equities Rule 7.31(h) to 
add a PL Select Order type. The text of the proposed rule change is 
available on the Exchange's Web site at www.nyse.com, at the principal 
office of the Exchange, 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
    The Exchange proposes to amend NYSE Arca Equities Rule 7.31(h) to 
add a PL Select Order type.
    Pursuant to NYSE Arca Equities Rule 7.31(h)(4), a Passive Liquidity 
(``PL'') Order is an order to buy or sell a stated amount of a security 
at a specified, undisplayed price. The PL Order was initially designed 
to attract liquidity to the Exchange by permitting market participants 
to express their trading interest more accurately than was possible 
with other order types available at the time.\3\ PL Orders were also 
designed to offer potential price improvement to incoming marketable 
orders submitted by any User.\4\
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    \3\ See Securities Exchange Act Release No. 54511 (September 26, 
2006), 71 FR 58460, 58461 (October 3, 2006) (SR-PCX-2005-53).
    \4\ Id. The term ``User'' means any ETP Holder or Sponsored 
Participant who is authorized to obtain access to the NYSE Arca 
Marketplace pursuant to Rule 7.29. See NYSE Arca Equities Rule 
1.1(yy).
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    The Exchange believes that it is appropriate to provide Users who 
enter PL Orders with the flexibility to be able to select what type of 
contra-side interest that would interact with their PL Order. The 
Exchange believes that by restricting specified contra-side interest 
from interacting with PL Orders, Users may be incentivized to enter 
larger-sized, more aggressively-priced orders. In particular, the 
Exchange believes that market participants interested in providing 
liquidity that would offer potential price improvement should be 
provided the option to select that their ``provider'' interest would 
not interact with pure ``taker'' interest, i.e., interest that will 
execute immediately with interest at the Exchange without ever resting 
on the Exchange's order book.
    The Exchange also believes that it would be able to attract larger-
sized, more aggressively priced PL Orders if the User has the choice 
not to execute against contra-side orders that are larger sized than 
the resting PL Order. Because large-sized orders are more likely to 
trade at multiple price points, such an incoming order would likely 
sweep up the PL order as it executes through multiple price points. In 
such scenario, the PL Order would not serve its primary function of 
providing price improvement, but would instead be an execution among 
many that would ultimately be at an inferior price. The Exchange 
believes that if Users entering PL Orders can select not to trade with 
an incoming order that is larger in size,

[[Page 34116]]

the PL Order will remain available on the Arca Book to provide price 
improvement for smaller incoming orders.
    To provide such flexibility, the Exchange proposes to add a new 
order type, the PL Select Order, which would be a subset of a PL Order. 
As proposed, NYSE Arca Equities Rule 7.31(h)(7) would define the PL 
Select Order as a PL Order that would not interact with an incoming 
order that: (i) has an immediate-or-cancel (``IOC'') time in force 
condition,\5\ (ii) is an ISO,\6\ or (iii) is larger than the size of 
the PL Select Order. The Exchange believes that the first two 
restrictions on trading with incoming IOC or ISO orders would enable 
Users to designate that their PL Orders would not trade with interest 
that would never become displayed or passive liquidity at the Exchange. 
The Exchange believes that the third restriction would serve to attract 
larger-sized PL Orders because the User would not have to risk having 
the PL Select Order being swept up by larger-sized contra interest 
thereby obviating the primary purpose of the PL Order to provide price 
improvement.
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    \5\ See NYSE Arca Equities Rule 7.31(e).
    \6\ See NYSE Arca Equities Rule 7.31(jj).
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    As proposed, except for the specified restrictions on trading with 
certain incoming orders, the PL Select Order would otherwise operate as 
a PL order and would retain its standing in execution priority among PL 
Orders. The Exchange notes, however, that for those instances when an 
incoming order meets one of the PL Select Order restrictions, the PL 
Select Order would be skipped and can be traded through.
    For example, assume that the protected best bid and offer is 
$19.00-$19.50 and a User enters a PL Select Order to buy 5,000 at 
$19.25 (B1). A second User enters an order to buy 1,000 at $19.00 (B2). 
If an incoming ISO sell order at $19.00 for 500 shares arrives (S1), S1 
would not trade with B1, and would instead trade with B2 for 500 shares 
at $19.00. Because B1 is a PL Select Order, and is restricted from 
trading with an ISO, it would be skipped. If another sell order at 
$19.00 for 700 shares arrives (S2), and it is not marked IOC or ISO, S2 
would execute against B1, 700 shares at $19.25. In this situation, 
because S2 does not meet any of the restrictions of the PL Select 
Order, B1, which arrived before B2, would receive the entire execution.
    In order to be placed on the Exchange's book initially, the 
Exchange further proposes that incoming PL Select Orders that are 
marketable would execute against all available contra-side interest, 
which potentially could include IOCs, ISOs, or larger-sized interest. 
After any marketable interest of the arriving PL Select Order executes, 
any remaining balance of the PL Select Order would be subject to the 
restrictions and would not trade with any incoming IOCs, ISOs, or 
larger-sized interest.
    The Exchange further proposes to add that upon notice to ETP 
Holders, the Corporation may suspend the entry of PL Select Orders. If 
such provision is invoked, Users may continue to submit PL Orders, but 
would not be able to enter PL Select Orders and all open PL Select 
Orders on the NYSE Arca trading book would be cancelled back to the 
User. The Exchange believes that it is appropriate to be able to 
suspend the entry of PL Select Orders in circumstances where the volume 
of orders creates an issue with the ability of the Exchange to timely 
process inbound orders to the Exchange.
    Because of the related technology changes that this proposed rule 
change would require, the Exchange proposes to announce the initial 
implementation date via Trader Update.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Securities Exchange Act of 1934 (the ``Act''),\7\ in general, and 
furthers the objectives of Section 6(b)(5),\8\ in particular, because 
it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, 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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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change would help 
prevent fraudulent and manipulative acts and practices because it would 
provide the ability for Users to select that a market participant that 
may be seeking only to probe the availability of hidden interest, and 
not add liquidity to the market, cannot execute against their passive 
liquidity. In particular, in today's equities market structure, the 
type of order flow that generally gets routed to the Exchange, and 
other registered exchanges, is order flow of the last resort. As 
evidenced by the increased use of off-Exchange trading venues, whether 
at dark pools or via internalization agreements at broker-dealers, by 
the time trading interest reaches an exchange, it is often cast-off 
trading interest, rather than the primary order flow of a broker-
dealer. The Exchange sees this with the high volumes of pinging-type of 
interest that arrives at the Exchange, and relatively low volumes of 
trading interest that is intended to be displayed or become passive 
interest. Such ``pinging'' interest generally comes from professional 
traders, rather than from public customers, and is seeking to ferret 
out hidden liquidity at an exchange, rather than to become passive 
liquidity.
    In seeking to attract more interest that is intended to be 
displayed interest and therefore promote just and equitable principles 
of trade, the Exchange proposes to add the PL Select Order type. As 
discussed in greater detail above, the PL Select Order type would be 
available to execute against any incoming interest that has the 
potential to become displayed or passive liquidity at the Exchange. The 
Exchange believes that the availability of the PL Select Order type 
could potentially incentivize the routing of interest to the Exchange 
that is intended to be displayed, which would support the goals of 
Regulation NMS to encourage the display of limit orders. In particular, 
Users interested in routing displayable interest to the Exchange would 
be aware that there is more likely to be hidden interest against which 
to execute because such hidden interest would not have been ``taken'' 
by pinging interest. To the extent there is any disadvantage because a 
PL Select Order skips an execution, it would be to professional traders 
who are choosing to send pinging interest, rather than to the investing 
public.
    Likewise, the Exchange believes that skipping executions with 
larger-sized incoming interest would similarly incentivize Users to 
route PL Orders to the Exchange because such orders would remain 
available to provide price improvement and would not be swept up by 
such larger-sized incoming orders. Because such PL Select Orders would 
remain available to provide price improvement, it could similarly 
incentivize Users to route displayable interest to the Exchange because 
the likelihood of receiving price improvement could increase.
    The Exchange further believes that the rule proposal promotes just 
and equitable principles of trade, and fosters cooperation and 
coordination with market participants because it provides additional 
flexibility for Users to specify against which interest their PL Orders 
would execute. The Exchange notes that Users can continue to enter PL 
Orders;

[[Page 34117]]

the ability to enter PL Select Orders would be an additional option for 
Users. Furthermore, the Exchange believes that the proposed PL Select 
Order furthers the goals of a free and open market and national market 
system by providing Users with the ability to add additional 
instructions to PL Orders to ensure that such orders are used primarily 
for liquidity providing, price improvement purposes.
    The Exchange further believes that providing the Exchange with the 
ability to suspend the entry of PL Select Orders supports the principle 
of promoting just and equitable principles of trade and removing 
impediments to and perfecting the mechanism of a free and open market. 
Currently, the technology process associated with the proposed PL 
Select Orders would be to assess each incoming order to determine 
whether it can interact with resting PL Select Orders. If, in the rare 
circumstances, the volume of orders received by the Exchange, including 
of PL Select Orders, and the attendant need to assess each order, 
results in reduced trading performance and increased latency, the 
Exchange believes that it is appropriate to suspend the entry of PL 
Select Orders, which would also result in cancelling any open PL Select 
Orders, until such time that the potential cause of increased latencies 
has been resolved.

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 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 Exchange 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-NYSEArca-2012-48 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-NYSEArca-2012-48. 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-NYSEArca-2012-48 and should 
be submitted on or before June 29, 2012.
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    \9\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-13893 Filed 6-7-12; 8:45 am]
BILLING CODE 8011-01-P