[Federal Register Volume 77, Number 167 (Tuesday, August 28, 2012)]
[Notices]
[Pages 52090-52095]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-21110]



[[Page 52090]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67713; File No. SR-NYSEMKT-2012-39]


Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change Amending Rule 928NY To 
Expand the Existing Market Maker Risk Limitation Mechanism Making It 
Available for Orders From Market Makers as Well as Non-Market Maker ATP 
Holders, and To Provide for Two Additional Risk Limitation Mechanisms

August 22, 2012.
    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 August 10, 2012, NYSE MKT LLC (the ``Exchange'' or ``NYSE 
MKT'') 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 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 amend Rule 928NY to expand the existing 
Market Maker Risk Limitation Mechanism to make it available for orders 
from Market Makers as well as non-Market Maker ATP Holders, and to 
provide for two additional risk limitation mechanisms. 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange adopted the existing Market Maker Risk Limitation 
Mechanism to provide a transaction-based mechanism for limiting a 
Market Maker's risk during periods of increased and significant trading 
activity on the Exchange in the Market Maker's appointment.\4\ The 
Exchange now proposes to expand the existing Market Maker Risk 
Limitation Mechanism to make it available for orders from Market Makers 
as well as orders from non-Market Maker ATP Holders (``non-Market 
Makers''),\5\ and to provide for two additional risk limitation 
mechanisms (collectively, the ``Risk Limitation Mechanisms''). The 
Exchange is proposing these changes to permit Market Makers and non-
Market Makers to better manage the risk of multiple, nearly 
simultaneous executions against their proprietary interest that, in 
today's highly automated and electronic trading environment, can occur 
across multiple series of different option classes. Consistent with the 
ability to better manage risk, the Exchange anticipates that these 
changes could enhance the Exchange's overall market quality as a result 
of narrowed quote widths and increased liquidity for series traded on 
the Exchange.
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    \4\ See Securities Exchange Act Release No. 59472 (February 27, 
2009), 74 FR 9843 (March 6, 2009) (SR-NYSEALTR-2008-14).
    \5\ The Exchange proposes to specify within Rule 928NY(a) that 
non-Market Maker ATP Holders will be referred to as ``non-Market 
Makers'' for purposes of Rule 928NY.
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    As noted above, the Exchange is proposing to make the three Risk 
Limitation Mechanisms available to non-Market Makers. The Exchange is 
proposing this change to respond to requests from non-Market Makers 
that engage in rapid, proprietary trading. In this regard, non-Market 
Makers can have risk exposure similar to that of Market Makers, and 
have similarly sought ways to mitigate this risk. The Exchange believes 
that making the Risk Limitation Mechanisms available to non-Market 
Makers will assist them in these efforts.
    As is the case today with the Market Maker Risk Limitation 
Mechanism, the trade counters, and therefore the Risk Limitation 
Mechanisms themselves, would be based on trading permit identification 
(``TPID'').\6\ As is also the case today with respect to the existing 
Market Maker Risk Limitation Mechanism, Market Makers would be required 
to activate one of the three Risk Limitation Mechanisms at all times 
for their quotes for each class in their appointment. However, the Risk 
Limitation Mechanisms would be entirely voluntary with respect to 
orders, both for those of Market Makers and non-Market Makers. Market 
Makers and non-Market Makers would only be permitted to activate one of 
the three Risk Limitation Mechanisms for a particular class at any 
given time for their orders. However, a Market Maker could activate one 
Risk Limitation Mechanism for its quotes and a different Risk 
Limitation Mechanism for its orders, even if both are activated for the 
same class.\7\ The three mechanisms are described in greater detail 
below.
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    \6\ TPIDs are assigned to Market Makers and non-Market Makers to 
identify them in the Exchange's systems.
    \7\ Market Makers on the Exchange are not able to submit orders 
on an agency basis. Therefore, a Market Maker within a firm that 
conducts both an agency and a market making business would have a 
unique TPID that could only be used for that Market Maker's quotes 
and orders. The proposed rule change would not prevent the use of 
the Risk Limitation Mechanisms for a non-Market Maker's agency order 
flow.
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(1) Transaction-Based Risk Limitation Mechanism
    The existing Market Maker Risk Limitation Mechanism is transaction-
based and automatically cancels all quotes posted by a Market Maker in 
an appointed class if the trade counter determines that ``n'' 
executions within one second have occurred against the quotes of the 
Market Maker in the particular appointed class.
    The Exchange proposes to amend Rule 928NY(b) to apply the existing 
Market Maker Risk Limitation Mechanism not only to Market Maker quotes, 
but also to non-Market Maker and Market Maker orders. As proposed, and 
similar to the existing process for Market Maker quotes,\8\ the 
Transaction-

[[Page 52091]]

Based Risk Limitation Mechanism would be triggered for a non-Market 
Maker whenever a trade counter has reached ``n'' executions within a 
time period specified by the Exchange via Regulatory Bulletin, as 
discussed further below, against the non-Market Maker's orders in a 
specified class. For Market Maker orders, the Transaction-Based Risk 
Limitation Mechanism would be triggered when a trade counter has 
reached ``n'' executions within a time period specified by the Exchange 
against the Market Maker's orders in a specified class. Accordingly, 
``Market Maker'' would be deleted from the title of Rule 928NY, as 
would any other references that would limit Rule 928NY only to Market 
Makers. Additionally, references to ``Transaction-Based'' would be 
added to Rule 928NY(b) to differentiate the existing mechanism from the 
newly-proposed Risk Limitation Mechanisms, as discussed in greater 
detail below. Additionally, much of the existing text of Rule 928NY(b) 
through (f) would be relocated as new Commentary to Rule 928NY, as 
discussed in greater detail below.
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    \8\ The existing Market Maker quote aspect of the mechanism 
would be renumbered as Rule 928NY(b)(3) and would be triggered when 
a trade counter has reached ``n'' executions within a time period 
specified by the Exchange against the Market Maker's quotes in an 
appointed class. As proposed under new Commentary .03 to Rule 928NY, 
the Exchange would announce via Regulatory Bulletin the applicable 
time period(s) for the Risk Limitation Mechanisms proposed under 
Rule 928NY. The Exchange also proposes to specify under Commentary 
.03 that the Exchange will not specify a time period of less than 
100 milliseconds. Additionally, the Exchange anticipates announcing 
via Regulatory Bulletin, as described in proposed Commentary .03, 
that the minimum, maximum and default settings for ``n,'' as well as 
the potential range for such settings, that are in effect at the 
time the Exchange implements this proposed change, will continue to 
apply to the Transaction-Based Risk Limitation Mechanism in the 
future. In this regard, the Exchange notes that it recently amended 
current Rule 928NY(b)(1) to specify that the potential range for the 
settings applicable to the existing Market Maker Risk Limitation 
Mechanism will be between one and 100 executions per second, to 
eliminate the current reference to the default setting, and, in the 
future, to specify the applicable minimum, maximum and default 
settings via Regulatory Bulletin. See Securities Exchange Act 
Release No. 67314 (June 29, 2012), 77 FR 40139 (July 6, 2012) (SR-
NYSEAmex-2012-23).
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(2) Volume-Based Risk Limitation Mechanism
    The Exchange proposes to provide for a new Volume-Based Risk 
Limitation Mechanism under Rule 928NY(c). The proposed Volume-Based 
Risk Limitation Mechanism would be triggered whenever one of the 
following conditions is met: (1) For a non-Market Maker, when a trade 
counter has reached ``k'' contracts traded within a time period 
specified by the Exchange against the non-Market Maker's orders in a 
specified class; (2) for a Market Maker, when a trade counter has 
reached ``k'' contracts traded within a time period specified by the 
Exchange against the Market Maker's orders in a specified class; or (3) 
for a Market Maker, when a trade counter has reached ``k'' contracts 
traded within a time period specified by the Exchange against the 
Market Maker's quotes in an appointed class.\9\
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    \9\ The Exchange anticipates announcing via Regulatory Bulletin 
that the applicable minimum and maximum settings for ``k'' (as well 
as the potential range for the settings applicable to the Volume-
Based Risk Limitation Mechanism) will be 20 and 5,000, respectively.
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(3) Percentage-Based Risk Limitation Mechanism
    The Exchange proposes to provide for a new Percentage-Based Risk 
Limitation Mechanism under Rule 928NY(d).\10\ The proposed Percentage-
Based Risk Limitation Mechanism would be triggered whenever one of the 
following conditions is met: (1) For a non-Market Maker, when a trade 
counter has calculated that the non-Market Maker has traded ``p'' 
percentage within a time period specified by the Exchange against the 
non-Market Maker's orders in a specified class; (2) for a Market Maker, 
when a trade counter has calculated that the Market Maker has traded 
``p'' percentage within a time period specified by the Exchange against 
the Market Maker's orders in a specified class; or (3) for a Market 
Maker, when a trade counter has calculated that the Market Maker has 
traded ``p'' percentage within a time period specified by the Exchange 
against the Market Maker's quotes in an appointed class.\11\ The ``p'' 
percentage specified by the non-Market Maker or Market Maker would be 
calculated as follows (and as shown in the examples below): \12\ (1) A 
trade counter would first calculate, for each series of an option 
class, the percentage of a non-Market Maker's or Market Maker's order 
size or a Market Maker's quote size that is executed on each side of 
the market, including both displayed and non-displayed size, and (2) a 
trade counter would then sum the overall series percentages for the 
entire option class to calculate the ``p'' percentage.
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    \10\ The proposed Percentage-Based Risk Limitation Mechanism is 
partially based on NASDAQ OMX PHLX (``PHLX'') Rule 1093. See 
Securities Exchange Act Release No. 53166 (January 23, 2006), 71 FR 
4625 (January 27, 2006) (SR-Phlx-2006-05).
    \11\ The Exchange anticipates announcing via Regulatory Bulletin 
that the applicable minimum and maximum settings for ``p'' (as well 
as the potential range for the settings applicable to the 
Percentage-Based Risk Limitation Mechanism) will be 100 and 2,000, 
respectively.
    \12\ The examples provided below are for Market Maker quotes, 
but would similarly apply to non-Market Maker and Market Maker 
orders.

    Example 1 
    For Examples 1 and 2, if a Market Maker is quoting at the 
National Best Bid or Offer (``NBBO'') in four series of an appointed 
class, and specifies its ``p'' percentage at 100%, a trade counter 
would calculate such percentage as follows:

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                                                                                     Number of
                             Series                                 Quote size       contracts        Series
                                                                                     executed       percentage
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Series 1........................................................             100              40              40
Series 2........................................................              50              20              40
Series 3........................................................             200              20              10
Series 4........................................................             150              15              10
                                                                 -----------------------------------------------
    Total.......................................................             500              95             100
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    In Example 1, the aggregate number of contracts executed among 
all series during the time period specified by the Exchange that 
equals the specified percentage of 100% is 95 contracts, at which 
point the Percentage-Based Risk Limitation Mechanism would be 
triggered and the Market Maker's remaining quotes in the appointed 
class would be cancelled.
    Example 2 

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                                                                                     Number of
                             Series                                 Quote size       contracts        Series
                                                                                     executed       percentage
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Series 1........................................................             100               0               0
Series 2........................................................              50               0               0
Series 3........................................................             200               0               0

[[Page 52092]]

 
Series 4........................................................             150             150             100
                                                                 -----------------------------------------------
    Total.......................................................             500             150             100
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    In Example 2, the aggregate number of contracts executed among 
all series during the time period specified by the Exchange that 
equals the specified percentage of 100% is 150 contracts, at which 
point the Percentage-Based Risk Limitation Mechanism would be 
triggered and the Market Maker's remaining quotes in the appointed 
class would be cancelled.
    Example 3 
    For Example 3, if a Market Maker is quoting at the NBBO in four 
series of a particular option class, and specifies its ``p'' 
percentage at 200%, a trade counter would calculate such percentage 
as follows:

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                                                                                     Number of
                             Series                                 Quote size       contracts        Series
                                                                                     executed       percentage
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Series 1........................................................             100              80              80
Series 2........................................................              50              40              80
Series 3........................................................             200              40              20
Series 4........................................................             150              30              20
                                                                 -----------------------------------------------
    Total.......................................................             500             190             200
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    In Example 3, the aggregate number of contracts executed among 
all series during the time period specified by the Exchange that 
equals the specified percentage of 200% is 190 contracts, at which 
point the Percentage-Based Risk Limitation Mechanism would be 
triggered and the Market Maker's remaining quotes in the appointed 
class would be cancelled.
Trade Counter
    The trade counters serve as the basis for determining whether a 
Risk Limitation Mechanism is triggered. Rule 928NY(a) currently 
describes the existing trade counter, which is incremented every time a 
Market Maker executes a trade against its quote in any series in an 
appointed class. The Exchange proposes to amend Rule 928NY(a) to 
reflect that the existing trade counter will be replaced by separate 
trade counters that the System will maintain for each of the following 
scenarios: (1) When a non-Market Maker order is executed in any series 
in a specified class; \13\ (2) when a Market Maker order is executed in 
any series in a specified class; and (3) when a Market Maker quote is 
executed in any series in an appointed class. The Exchange also 
proposes to reflect that for each of these scenarios the trade counters 
will be incremented by one every time a trade is executed and will also 
aggregate the number of contracts traded during each such execution. 
The trade counters will also calculate applicable percentages for 
Market Makers and non-Market Makers using the proposed Percentage-Based 
Risk Limitation Mechanism. These proposed changes to Rule 928NY(a) are 
necessary due to the changes proposed below.
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    \13\ The Exchange proposes to include the concept of a 
``specified class'' to reflect that Market Makers and non-Market 
Makers must specify the class(es) for which a Risk Limitation 
Mechanism is activated for orders or none of the Risk Limitation 
Mechanisms will be activated.
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General

    As proposed under new Commentary .01 to Rule 928NY, and similar to 
the current description in existing Rule 928NY(b), the System would 
automatically cancel electronic orders or quotes pursuant to proposed 
paragraph (e) of Rule 928NY \14\ by generating a ``bulk cancel'' 
message.\15\ Similar to the current description in existing Rule 
928NY(c), the bulk cancel message would be processed by the System in 
time priority with any other quote or order message received by the 
System.\16\ Additionally, any orders or quotes that matched with a 
Market Maker's quote or a Market Maker's or non-Market Maker's order 
and were received by the System prior to the receipt of the bulk cancel 
message would be automatically executed. However, orders or quotes 
received by the System after receipt of the bulk cancel message would 
not be executed. In this regard, the proposed rule change would not 
relieve a non-Market Maker or Market Maker of its ``firm quote'' 
obligation under Rule 602 of Regulation NMS \17\ or Rule 970NY. 
Furthermore, the proposed rule change would not relieve Market Makers 
on the Exchange of their quoting obligations under the Exchange's 
Rules.\18\
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    \14\ As proposed under Rule 928NY(e), the System would take the 
following action if one of the Risk Limitation Mechanisms described 
herein is triggered: (1) If triggered pursuant to proposed paragraph 
(b)(1), (c)(1) or (d)(1) of Rule 928NY, the System would 
automatically cancel all of the non-Market Maker's orders in the 
specified class; (2) if triggered pursuant to proposed paragraph 
(b)(2), (c)(2) or (d)(2) of Rule 928NY, the System would 
automatically cancel all of the Market Maker's orders in the 
specified class; or (3) if triggered pursuant to proposed paragraph 
(b)(3), (c)(3) or (d)(3) of Rule 928NY, the System would 
automatically cancel all of the Market Maker's quotes in the 
appointed class.
    \15\ As is the case today for the existing Market Maker Risk 
Limitation Mechanism, the Risk Limitation Mechanisms provided under 
Rule 928NY would only be applicable to electronic trading on the 
Exchange.
    \16\ As is the case today for the existing Market Maker Risk 
Limitation Mechanism, Public Customer orders cancelled pursuant to a 
Risk Limitation Mechanism bulk cancel message would not be counted 
for purposes of calculating the Exchange's Cancellation Fee.
    \17\ 17 CFR 242.602.
    \18\ See, e.g., Rule 925NY.
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    As proposed under new Commentary .02 to Rule 928NY, and similar to 
the current description in Rule 928NY(d), if one of the Risk Limitation 
Mechanisms is triggered pursuant to proposed paragraph (b)(1) or (2), 
(c)(1) or (2), or (d)(1) or (2) of Rule 928NY, any orders sent by the 
non-Market Maker or Market Maker, respectively, in the specified class 
would be rejected until the non-Market Maker or Market Maker submits a 
message to the System to enable the entry of new orders. Similarly, if 
one of the Risk Limitation Mechanisms is triggered pursuant to proposed 
paragraph (b)(3), (c)(3), or (d)(3) of Rule 928NY, any quotes sent by 
the Market Maker in the appointed class would be rejected until the 
Market Maker submits a message to the System to enable the entry of new 
quotes.

[[Page 52093]]

    As proposed under new Commentary .03 to Rule 928NY, the Exchange 
would specify via Regulatory Bulletin any applicable minimum, maximum 
and/or default settings for the Risk Limitation Mechanisms proposed 
under Rule 928NY.\19\ This would include those settings that are 
applicable for the existing Market Maker Risk Limitation Mechanism at 
the time the Exchange implements this proposed change, which, as 
discussed above, would be renamed as the Transaction-Based Risk 
Limitation Mechanism, as well as for the proposed new Volume-Based and 
Percentage-Based Risk Limitation Mechanisms.\20\ Accordingly, the text 
proposed within Commentary .03 is designed to conform to the text that 
is currently provided under Rule 928NY(b)(1).\21\ The Exchange also 
proposes to specify under Commentary .03 that the Exchange will not (i) 
specify a minimum setting of less than one or a maximum setting of more 
than 100 for the Transaction-Based Risk Limitation Mechanism; (ii) 
specify a minimum setting of less than 20 or a maximum setting of more 
than 5,000 for the Volume-Based Risk Limitation Mechanism; or (iii) 
specify a minimum setting of less than 100 or a maximum setting of more 
than 2,000 for the Percentage-Based Risk Limitation Mechanism. 
Similarly, as proposed under new Commentary .03 to Rule 928NY, the 
Exchange would specify via Regulatory Bulletin the applicable time 
period(s) for the Risk Limitation Mechanisms proposed under Rule 928NY. 
The Exchange also proposes to provide under Commentary .03 that the 
Exchange will not specify a time period of less than 100 milliseconds.
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    \19\ The Exchange will issue the Regulatory Bulletin at least 
one trading day in advance of the settings becoming effective. All 
such Regulatory Bulletins will contain information regarding changes 
to the settings in the Risk Limitation Mechanisms, the effective 
date of such changes and contact information of Exchange staff who 
can provide additional information. The Exchange distributes 
Regulatory Bulletins simultaneously to all ATP Holders via email and 
posts the Regulatory Bulletins to the Exchange's Web site.
    Upon receiving notification of a change to the settings for the 
Risk Limitation Mechanisms by the Exchange, ATP Holders will be able 
to make adjustments they deem necessary to their own risk settings 
for the Risk Limitation Mechanisms using the same electronic 
interface that they use to send quotes and orders to the Exchange. 
In addition, ATP Holders may elect to adjust risk settings in their 
own proprietary systems in reaction to any changes initiated by the 
Exchange. When adjusting risk parameters for the Risk Limitation 
Mechanisms and/or a proprietary system, in reaction to a change to 
the risk settings by the Exchange, ATP Holders are able to utilize 
functionality that is both readily available and user controlled.
    Accordingly, the Exchange believes that providing ATP Holders 
with at least one day's advance notice prior to making adjustments 
to the settings of the Risk Limitation Mechanisms will afford ATP 
Holders sufficient time to review their risk settings and make 
operational and/or technological changes, to either the user 
controlled risk settings for the Risk Limitation Mechanisms or to 
their own proprietary systems, necessary to accommodate any such 
changes made by the Exchange.
    \20\ See supra notes 8, 9, and 11. The default settings would 
apply only to Market Makers using the Transaction-Based Risk 
Limitation Mechanism, and further would apply only with respect to a 
Market Maker's quotes, not its orders.
    \21\ See Securities Exchange Act Release No. 67314 (June 29, 
2012), 77 FR 40139 (July 6, 2012) (SR-NYSEAmex-2012-23).
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    As proposed under new Commentary .04 to Rule 928NY, once a Market 
Maker activates a Risk Limitation Mechanism provided under Rule 928NY 
for its quotes in an appointed class, the mechanism, and the settings 
established by the Market Maker, would remain active unless, and until, 
the Market Maker deactivates the mechanism or changes the settings.\22\ 
A non-Market Maker or Market Maker must activate a Risk Limitation 
Mechanism provided under Rule 928NY for its orders in a specified 
class, and any corresponding settings, on a daily basis, if at all, or 
the Risk Limitation Mechanism would not be active. As is the case today 
for the existing Market Maker Risk Limitation Mechanism, the Risk 
Limitation Mechanisms provided under Rule 928NY would be in effect, if 
activated by a non-Market Maker or Market Maker, during Core Trading 
Hours,\23\ including during Trading Auctions (i.e., executions during a 
Trading Auction would be counted by the trade counters).\24\
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    \22\ As noted above, a Market Maker must have one of the three 
Risk Limitation Mechanisms active for its quotes at all times for 
each class in its appointment. Therefore, if a Market Maker 
deactivates a Risk Limitation Mechanism, it must then activate 
another Risk Limitation Mechanism for a particular class.
    \23\ See Rule 900.2NY(15).
    \24\ See Rule 952NY. For example, and as discussed above with 
respect to the bulk cancel message, an order or quote that matches 
with a non-Market Maker's or Market Maker's order or a Market 
Maker's quote during a Trading Auction, but prior to the receipt of 
the bulk cancel message by the System, would be executed. However, 
an order or quote received by the System during a Trading Auction, 
but after receipt of the bulk cancel message, would not be eligible 
for execution against the non-Market Maker's or Market Maker's 
orders or the Market Maker's quotes.
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    As proposed under new Commentary .05 to Rule 928NY, and similar to 
the current description under Rule 928NY(f), in the event that there 
are no Market Makers quoting in a class, the best bids and offers of 
those orders residing in the Consolidated Book in the class shall be 
disseminated as the Exchange's best bid or best offer. If there are no 
Market Makers quoting in the class and there are no orders in the 
Consolidated Book in the class, the System would disseminate a bid of 
zero and an offer of zero.
    As proposed under new Commentary .06 to Rule 928NY, the trade 
counters would automatically reset and commence a new count (1) when a 
time period specified by the Exchange elapses or, (2) if one of the 
Risk Limitation Mechanisms provided under Rule 928NY is triggered for a 
particular class, when the non-Market Maker or Market Maker submits a 
message to the System to enable the entry of new orders or quotes, as 
provided in proposed Commentary .02 to Rule 928NY.
    As proposed under new Commentary .07 to Rule 928NY, only executions 
against order types specified by the Exchange via Regulatory Bulletin 
and against quotes of Market Makers would be considered by a trade 
counter.\25\ Executions against Market Maker orders would not be 
considered by a trade counter in connection with a Market Maker's 
quoting activity. Likewise, executions against Market Maker quotes 
would not be considered by a trade counter in connection with a Market 
Maker's order activity. The Exchange believes that specifying 
applicable order types via Regulatory Bulletin, including any changes 
thereto in the future, (i) would be consistent with the manner in which 
the Exchange currently announces the applicable minimum, maximum and 
default settings for the Risk Limitation Mechanisms; \26\ (ii) would be 
consistent with the manner in which the Exchange proposes to announce 
the applicable time period(s) for the Risk Limitation Mechanisms; and 
(iii) would also be consistent with the manner in which the Commission 
currently permits other option exchanges to communicate settings or 
parameters for various exchange mechanisms to their members other than 
through the rule filing process, i.e., via notices, bulletins or 
circulars.\27\
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    \25\ Due to technology considerations, the Exchange plans to 
initially apply the Risk Limitation Mechanisms only to the following 
order types: ``PNP Orders,'' ``PNP--Blind Orders,'' and ``PNP--Light 
Orders.'' The Exchange has selected these particular order types 
because they are the most commonly used order types of non-Market 
Makers engaged in proprietary trading. In this respect, non-Market 
Makers use these order types because they are non-routable Limit 
Orders that are only executed on the Exchange. In the future, the 
Exchange may determine to expand the Risk Limitation Mechanisms to 
other order types used by such firms, and it would announce any such 
changes via Regulatory Bulletin pursuant to proposed Commentary .07 
to Rule 928NY.
    \26\ See supra notes 8, 9 and 11.
    \27\ See, e.g., BOX Options Exchange LLC (``BOX'') Rule 8140, 
which provides that, related to BOX's Quote Removal Mechanism Upon 
Technical Disconnect, BOX Market Makers will be notified of the 
value that ``n'' seconds represents via Regulatory Circular. See 
also Securities Exchange Act Release No. 58140 (July 10, 2008), 73 
FR 41384 (July 18, 2008) (SR-BSE-2008-40), in which the Commission 
noted that ``n'' seconds would be configurable by BOX and any 
subsequent re-configurations will be announced to Market Makers via 
Regulatory Circular. See also Interpretation and Policy .05 to 
Chicago Board Options Exchange (``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 Rule 
6.13(b)(i)(C)(2)(a), which provides that CBOE may establish certain 
maximum order size eligibility requirements with respect to 
automatic executions and announce such determinations via 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 CBOE changes the priority. 
See also CBOE Rule 6.25(a)(4)(i), which provides that, for purposes 
of nullifying a trade due to an erroneous print in an underlying or 
related instrument, CBOE may announce such underlying or related 
instrument via Regulatory Circular. See also C2 Options Exchange 
(``C2'') Rule 6.13, which provides that C2 may make certain 
determinations regarding the price check parameter feature and 
announce such determinations via Regulatory Circular. See also 
Securities Exchange Act Release No. 65311 (September 9, 2011), 76 FR 
57094 (September 15, 2011) (SR-C2-2011-018).

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[[Page 52094]]

    As proposed under new Commentary .08 to Rule 928NY, a determination 
of whether the conditions of proposed paragraph (b), (c) or (d) of Rule 
928NY have been met, and any resulting cancellation of orders or quotes 
pursuant to proposed paragraph (e) of Rule 928NY, shall be made on the 
basis of TPID.\28\ For example,\29\ a non-Market Maker that submits 
orders to the Exchange under separate TPIDs would not have the orders 
from each TPID aggregated for purposes of the Risk Limitation 
Mechanisms. Instead, the orders attributable to each TPID would be 
counted by the trade counters separately, and the triggering of a Risk 
Limitation Mechanism for one of the non-Market Maker's TPIDs would not 
result in a trigger of a Risk Limitation Mechanism for the other TPID 
of the non-Market Maker. Also, as noted above, a non-Market Maker or a 
Market Maker could activate no more than one of the three Risk 
Limitation Mechanisms for a particular class for its orders and a 
Market Maker would be required to have exactly one of the three Risk 
Limitation Mechanisms activated at all times for its quotes for each 
class in its appointment. However, a Market Maker could activate one 
Risk Limitation Mechanism for its quotes and a different Risk 
Limitation Mechanism for its orders, even if both are activated for the 
same class.
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    \28\ See supra notes 6 and 7.
    \29\ This example would similarly be applicable to Market 
Makers.
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    Finally, as proposed under new Commentary .09 to Rule 928NY the 
terms ``class'' and ``classes'' include all option series, both puts 
and calls, overlying the same underlying security. The purpose of 
Commentary .09 is to eliminate any potential confusion as to the scope 
of the proposed Risk Limitation Mechanisms.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Securities Exchange Act of 1934 (the 
``Act''),\30\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\31\ 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 regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, 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 and because it is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \30\ 15 U.S.C. 78f(b).
    \31\ 15 U.S.C. 78f(b)(5).
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    In particular, the proposed rule change would prevent fraudulent 
and manipulative acts and practices and promote just and equitable 
principles of trade because it would provide non-Market Makers and 
Market Makers with greater control and flexibility with respect to 
managing risk and the manner in which they enter orders and quotes. 
This would be accomplished by expanding the existing Market Maker Risk 
Limitation Mechanism to Market Maker orders and the orders of non-
Market Makers as well as through the creation of the proposed new 
Volume-Based and Percentage-Based Risk Limitation Mechanisms. Increased 
control and flexibility would also be accomplished by lowering the 
minimum time period applicable to the Risk Limitation Mechanisms, as 
compared to the existing Market Maker Risk Limitation Mechanism, from 
one second to no less than 100 milliseconds. In this regard, the 
Exchange believes that a lower minimum time period would be more 
consistent with the rapid trading that occurs in today's highly 
automated and electronic trading environment. The Exchange also 
believes that the increased control and flexibility that would result 
from this proposal would foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, and processing 
information with respect to, and facilitating transactions in, 
securities.
    The Exchange further believes that the proposed rule change would 
remove impediments to, and perfect the mechanisms of, a free and open 
market and a national market system because it would promote 
consistency, fairness, and objectivity by making the Risk Limitation 
Mechanisms available to all non-Market Makers and Market Makers, which 
therefore may enhance the Exchange's overall market quality. The 
Exchange believes that the potential increase in the Exchange's overall 
market quality that could result from the Risk Limitation Mechanisms 
could therefore contribute to the protection of investors and the 
public interest.
    The Exchange further believes that the proposed rule change would 
remove impediments to, and perfect the mechanisms of, a free and open 
market and a national market system because it would permit the 
Exchange to announce the minimum, maximum and default settings for the 
Risk Limitation Mechanisms, as well as any applicable time period(s) 
and order types, via Regulatory Bulletin. The Exchange believes that 
the flexibility of announcing these details via Regulatory Bulletin is 
necessary because it would permit the Exchange to reasonably ensure 
that, for example, the applicable settings are at a level that is 
consistent with existing market conditions, such that the Risk 
Limitation Mechanisms are able to operate in the manner intended. Use 
of Regulatory Bulletins would also be consistent with the manner in 
which the Exchange currently announces the minimum, maximum and default 
settings for the existing Market Maker Risk Limitation Mechanism as 
well as the manner in which the Commission currently permits other 
option exchanges to communicate settings or parameters for various 
exchange mechanisms to their members other than through the rule filing 
process, i.e., via notices, bulletins or circulars.\32\ Utilizing 
Regulatory Bulletins in this manner would, for example, permit the 
Exchange to increase or decrease the time period applicable to the Risk

[[Page 52095]]

Limitation Mechanisms, should the Exchange choose to do so, to 
accommodate systems capacity concerns, changes in market conditions or 
the technology needs and considerations of Market Makers and non-Market 
Makers.
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    \32\ See supra note 27. For example, NASDAQ OMX Options 
Technical Update 2012-9 was recently distributed to notify 
participants on NASDAQ Options Market (``NOM''), PHLX and NASDAQ OMX 
BX Options (``BX'') that, effective as of the date of the Technical 
Update (i.e., July 20, 2012), those markets would decrease the 
allowable time interval setting for the ``Rapid Fire Risk 
Protection,'' from increments of one second to increments as small 
as 100 milliseconds.
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    The Exchange also believes that the use of Regulatory Bulletins in 
this manner would further remove impediments to, and perfect the 
mechanisms of, a free and open market by reducing the resources that 
would otherwise be expended, by both the Exchange and the Commission, 
if the Exchange is required to propose a rule change with the 
Commission each time it wishes to change these settings. However, while 
the Exchange would have certain discretion with respect to the levels 
at which it could adjust these settings, the Exchange would not be 
permitted to adjust the settings below the minimum levels proposed 
herein. The Exchange believes that this would reasonably ensure that 
the settings are at all times within a reasonable range.
    The Exchange notes that the proposed rule change would not relieve 
a non-Market Maker or Market Maker of its ``firm quote'' obligation 
under Rule 602 of Regulation NMS \33\ or Rule 970NY, thereby 
contributing to the protection of investors and the public interest. In 
this regard, and as discussed above, the bulk cancel message generated 
pursuant to the Risk Limitation Mechanisms would be processed in time 
priority with any other quote or order message received by the System. 
Additionally, any orders or quotes that matched with a Market Maker's 
quote or a Market Maker's or non-Market Maker's order and were received 
by the System prior to the receipt of the bulk cancel message would be 
automatically executed. However, orders or quotes received by the 
System after receipt of the bulk cancel message would not be executed. 
The Exchange further notes that the proposed rule change would not 
relieve Market Makers on the Exchange of their quoting obligations 
under the Exchange's Rules.\34\ In this regard, and as is the case 
today, a Market Maker quote that is cancelled or rejected would no 
longer count toward satisfying the Market Maker's percentage quoting 
obligation under Rule 925NY. Additionally, the proposed rule change is 
not designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers because it would be applicable to, and 
available for, all market participants on the Exchange, including non-
Market Makers and Market Makers.
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    \33\ 17 CFR 242.602.
    \34\ See supra note 18.
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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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \35\ and Rule 19b-4(f)(6) thereunder.\36\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \37\ and Rule 19b-
4(f)(6)(iii) thereunder.\38\
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    \35\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \36\ 17 CFR 240.19b-4(f)(6).
    \37\ 15 U.S.C. 78s(b)(3)(A).
    \38\ 17 CFR 240.19b-4(f)(6)(iii). 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 this requirement.
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    At any time within 60 days of the filing of such 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-NYSEMKT-2012-39 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-NYSEMKT-2012-39. 
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 Section, 100 
F Street NE., Washington, DC 20549-1090, on official business days 
between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing will 
also be available for inspection and copying at the Exchange's 
principal office and on its Internet Web site at 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-NYSEMKT-2012-39 and should 
be submitted on or before September 18, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\39\
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    \39\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-21110 Filed 8-27-12; 8:45 am]
BILLING CODE 8011-01-P